Consider the cola industry, in which Coke and Pepsi are the two dominant firms. (To keep the analysis simple, just forget about all the others.) The market size is $8 billion. Each firm can choose...

Consider the cola industry, in which Coke and Pepsi are the two dominant firms. (To keep the analysis simple, just forget about all the others.) The market size is $8 billion. Each firm can choose whether to advertise. Advertising costs $1 billion for each firm that chooses it. If one firm advertises and the other doesn’t, then the former captures the whole market. If both firms advertise, they split the market 50:50 and pay for the advertising. If neither advertises, they split the market 50:50 but without the expense of advertising.

(a) Write the payoff table for this game, and find the equilibrium when the two firms move simultaneously.

(b) Write the game tree for this game (assume that it is played sequentially), with Coke moving first and Pepsi following.

(c) Is either equilibrium in parts (a) and (b) better from the joint perspective of Coke and Pepsi? How could the two firms do better?