Respond to… Game Theory and Strategic Behavior 1. Suppose that GE is trying to prevent Maytag from entering the market for high-efficiency clothes dryers. Even though high-efficiency dryers are more costly to produce, they are also more profitable as they command sufficiently higher prices from consumers. The following payoffs table shows the annual profits for GE and Maytag for the advertising spending and entry decisions that they are facing. GE MAYTAG Advertising = $12m Advertising = $0.7m Stay Out $0, $30m $0, $35m Enter $ 1m, $20m $12m, $15 Based on this information, can GE successfully prevent Maytag from entering this market by increasing its advertising levels? What is the equilibrium outcome in this game? Suppose that an analyst at GE is convinced that just a little bit more advertising by GE, say another $2m, would be sufficient to deter enough customers from buying Maytag, thus, yield less than $0 profits for Maytag in the event it enters. Suppose that spending an extra $2m on advertising by GE will reduce its expected profits by $1.5 m, regardless of whether Maytag enters or stays out. Would this additional spending on advertising achieve the effect of deterring Maytag from entering? Should GE pursue this option? If GE maintains its advertising expenditure to $12M and Maytag stays out of the market, then GEs profit will be $30M. If it enters the market, then Maytag’s profit will be $1M while GE’s profit will be $20M. This results in a loss of $10M due to Maytag entry to the market. Whereas, if GE maintains its advertising expenditure to $700,000 and Maytag stays out of the market, then GEs profit will be $35M. Now, if it enters the market, then Maytag profits will be $12M while GE’s profit will be $15M. Now, this will result in a loss of $20M due to Maytag entry to the market. In business its a 50 percent chance that advertising works, knowing your competition knowing what to communicate to the public and knowing your profit is very important factors. In this situation putting more money in the advertisement wouldnt be the best idea for GE due to the profit that they will receive if Maytag enters the market. that GE may not be able to prevent Maytag from entering the market. Maytag may also anticipate that GE will increase advertising may not be able to prevent Maytag from entering the market. it may not be wise for GE to put more money in the advertisement due to the profit that they will receive if Maytag enters into the market. Also a great example, Winn-Dixie was never the same, even though they spent all that money on advertisement, they lost all of the business. GE may not be able to prevent Maytag from entering the market. Maytag may also anticipate that GE will increase advertising may not be able to prevent Maytag from entering the market. Maytag may also anticipate that GE will increase advertising It would deter Maytag to enter the business even as the net profitability will be hit as the equilibrium has not been established. it would not be a good idea for GE to spend more money on advertising, due to the profit that they will receive if Maytag enters into the market. Reference Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/ Respond to… Advertisement $14M Advertisement $12M Advertisement $0.7M Stay Out $0 , $28.5M $0, $30M $0, $35M Enter $-1M, $18,5M $1M , $20M $12M , $15M I found that Game Theory is a very interesting topic within economics. In this case, we dont know if Maytag will enter the market but GE feels that there is a threat that they will which will take away market share and profits from the company. According to Douglas, 2012, a game is a situation in which two or more players choose strategies to compete for a reward or payoff. In this situation, GE is trying to determine the strategy of increasing advertising to keep Maytag from entering the market for high efficiency clothes dryers. Acc…
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