Game theory Question

Game Theory Question

Big Godfrey Corporation (BGC) produces in an industry where it has only one major competitor, Red Devil Corporation (RDC). These two companies have a total of 85% of the market BGC is trying to decide if it should increase its advertising budget. Profits would increase if RDC does not increase its advertising. However, if they both increase their advertising budgets, profits will remain relatively the same unless BGC captures some of the market that currently is part of the 15% that neither BGC nor RDC now have. This is a typical problem for an oligopoly.

Contrast economic decision making of an oligopoly such as BGC to a typical firm in a perfectly competitive market. Make sure you cover the following points:

A) How they deal with a competitor

B) The use of advertising

C) Pricing policy

D) Potential for long run economic profit