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1. Glassworks and Clearsmooth compete in the local market for windshield repairs. The market size (total available profits) is $10 million per year. Each firm can choose whether to advertise on local television. If a firm chooses to advertise in a given year, it costs that firm $3 million. If one firm advertises and the other does not, then the former captures the entire market. If both firms advertise, they split the market 50:50. If both firms choose not to advertise, they also split the market: 50:50.
The payoff matrix can be formed as below: When both of them do not advertise, each share 50% of the market share. Thus their payoffs are $5 million each. When both advertise, they share the market equally. Their payoff= $5million-$3 million= $ 2million When one advertises and the other does not, the former captures the entire market. Thus payoff for former is $10-3…

llion= $7 million and 0 for the latter. Thus, we have, Clearsmooth Adv No adv Glassworks Adv. (2,2) (7,0) No adv (0,7) (5,5) From the above matrix we see that the Nash strategy for them is that both should advertise and share the markets equally.



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