Nash equilibrium
Paper details:
Answers should be one-two paragraphs long, or at least 10-15 sentences.
• Type answers in Word document; Font size 12.
STRATEGIC GAMES
Cigarette manufacturers were among the first companies to advertise extensively on television. Older people today can still hum the heavily advertised jingle, “Winston tastes good like a cigarette should.” They can also remember beautiful women with black eyes as they testified, “Tarey-ton smokers would rather fight than switch.” John Wayne and other movie stars appeared in commercials to endorse cigarettes. Cigarette
companies were the major sponsors for many popular television shows. The companies also paid to have cigarettes included in the actual programs. In 1962 the cartoon characters Fred and Wilma Flintstone were shown smoking Winston cigarettes.
The U.S. federal government banned television advertising of cigarettes starting in 1971. Interestingly, the leading cigarette manufacturing companies supported the ban, even though they had advertised heavily on television since 1940s.
1. Design a simple two-company game that illustrates why it might have been in the economic interests of the cigarette companies to support the ban. In designing the game, assume that there is no regulation and that
the two firms simultaneously choose between advertising and not advertising. Display your hypothetical payoffs in strategic form (3rd edition: see Table 15.7, pg.176; 4th edition: see Table 15.7, pg.193) and
highlight the Nash equilibrium.
Explain the intuition for why the firms in your example would favor regulation to ban advertising.
2. Can you conclude from your example that all firms in all industries will favor bans on television advertising? Explain.
Can you ever envision a situation where one firm might favor the ban and a competing firm might be against it? Explain your opinion.
3. Compare and contrast the cigarette industry in the 20th century with the vaping industry today.
-Would you support ban on advertising vaping?
-Should the vaping industry undergo the same public policy restrictions and taxations that the cigarette industry went through in the past?
-Explain how the vaping novelty affect young people health and project effective policies to minimize the nicotine consumpticgoon in the next 5-10 years.
