Answer to Question #53822 in Economics of Enterprise for Abdulaziz

Question

a. General Mills and Kellogg are two of the biggest players in the market for breakfast cereals. At their current level of operation, each makes $6 million per year in profit. Both are considering costly new advertising campaigns to gain market share. If one moves forward with the advertising campaign but the other does not, the one that moves forward expands market share and increases profit to $8 million while the other loses market share and profit falls to $2 million. If both adopt a new costly advertising campaign, then both companies’ profits fall to $4 million. Set up a payoff matrix to describe this decision-making situation.

b. Why is the drug cartel more effective than the oil cartel?