Microeconomics – Week 8 Project Part 8
Pay-Off Matrix
| Action | Frantic hires celebrity spokesperson | Frantic does not hire a celebrity spokesperson |
| Fuse hires celebrity spokesperson | 10% profit increase for both Fuse and Frantic | 15% market share increase for Fuse
20% profit decrease for Frantic |
| Fuse does not hire a celebrity spokesperson | 20% profit decrease for Fuse
15% market share increase for Frantic |
0% change on profit and market share for both Fuse and Frantic |
Discussion
Fuse acts as the prevailing market player within the above pay-off matrix. This means that Frantic’s market approaches within the game are determined by Fuse’s actions as the market mover (Webb 12). Therefore, profit levels for both trading corporations are established by Fuse. Fuse bears two stratagems, namely hiring or not hiring a celebrity speaker. The same applies to Frantic. If Fuse hires and Frantic retaliates with the same move, both institutions acquire 10% profit increments on their respective levels. If Fuse hires and Frantic resorts to a non-hiring approach, then Fuse will experience a 15% profit increase on its market size whereas Frantic’s market share will drop by 20% (Webb 23).
On the other hand, if Fuse does not hire the celebrity and Frantic hires, Fuse will bear a 20% decrease on its profits, whereas Frantic will enhance its market share by 15%. If Fuse does not hire and Frantic retaliates with the same move, then both maintain their present profit levels. From this, two Nash equilibriums are created by the payoff: hiring for both institutions and non-hiring practices for both companies. If Fuse hires, then Frantic, in a bid to ensure that the least costs are attained through the move, would rationally resort to the same practice for the 10% increment level (Webb 69). On the other hand, the non-hiring approach for Fuse would be too high a cost since Frantic would rationally implement the hiring option for the 15% increase on its profits and a 20% decrease on Fuse’s market. Between the two equilibriums therefore, only the hiring stratagem presents a rational solution.
Conclusion
With only one rational Nash equilibrium point, Molly should employ the celebrity spokesperson (Webb 69).
Works Cited
Webb, James. Game theory: decisions, interaction and evolution. New York: Springer, 2007. Print.
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