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2 enterprises (1 and 2), are in competition with each other by choosing advertising expenditures. The payoff functions of the two enterprises, if enterprise 1 chooses to spend x and enterprise 2 chooses y to spend in market 1, are given by
u1 (x; y) = 1 + (x - y) (2 - 3x)u2 (x; y) = 1 + (y - x) (1 - 3y)
a) What is the best response functions of enterprise 1 and enterprise 2.
b) Suggest the Nash equilibrium levels of expenditures by each enterprise?
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Using the data, suppose the manufacturer has an inflated demand forecast as follows: Quantity Probability 2,200 5% 2,300 6% 2,400 10% 2,500 17% 2,600 30% 2,700
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