4. (10 points) At cereal a time maker when Kellogg's demand was for ready-to-eat cereal was...

a) Payoff table

Simultaneous one shot game

NE : (both firms advertise)

b)

if both could collude, where if both could decide, not to advertise, each is better off , & gets 12

c) r = .35, the discount Factor d = 1/(1+r)

d = 1/1.35= .7407

then if both Cooperate, present value of cooperation Payoff

Vc = 12+12d + 12d² + 12d³ + ....

= 12/(1-d)

= 46.285

if any one deviates, then cheater gets 52 this period, & punishment starts next period, where each gets 0 , the nash eqm payoff,

so present discount value PDV of cheating payoff

Vd = 52+ 0 + 0....

So

as Vc < Vd

then cooperation can't be sustained, firms can't do better