Game Theory and Strategic Behavior
Suppose that GE is trying to prevent Maytag from entering the market for high efficiency clothes
dryers. Even though high efficiency dryers are more costly to produce, they are also more
profitable as they command sufficiently higher prices from consumers. The following payoffs
table shows the annual profits for GE and Maytag for the advertising spending and entry
decisions that they are facing.
GE
Stay Out
Advertising =
$12m
Advertising =
$0.7m
$0, $30m
$0, $35m
$1m , $20m
$12m, $15
MAYTAG
Enter
Based on this information, can GE successfully prevent Maytag from entering this market by
increasing its advertising levels? What is the equilibrium outcome in this game?
Suppose that an analyst at GE is convinced that just a little bit more advertising by GE, say
another $2m, would be sufficient to deter enough customers from buying Maytag, thus, yield less
than $0 profits for Maytag in the event it enters. Suppose that spending an extra $2m on
advertising by GE will reduce its expected profits by $1.5 m, regardless of whether Maytag
enters or stays out. Would this additional spending on advertising achieve the effect of deterring
Maytag from entering? Should GE pursue this option?
Guided Response:
In 300 words or more, please, provide your response to the above discussion question. Please,
show all your calculations and explain your responses. Respond substantively to at least two of
your classmates’ postings. Substantive responses use theory, research, and experience or
examples to support ideas and further the class knowledge on the discussion topic.
If General Electric (GE) maintains their current advertising level of $12,000,000 and
Maytag stays out of the market GE’s profit will be $30,000,000, if GE increases their
advertising by 0.7 million dollars and Maytag stays out of the market GE will make
$35,000,000. If Maytag enters the market and GE advertising remains the same,
Maytag will have one million dollars in profit and GE’s profit will drop to
$20,000,000. If Maytag enters the market and GE increases their advertising by $0.7
million; Maytag’s profit will be $12,000,000 and GE’s profit will fall again to
$15,000,000. The diminishing profit is due to diminishing returns on the amount of
advertising. Each increase of the advertising money shifts the curve to the right a
little less than the last time. This is a zero sum game where whatever one side loses
the other gains that amount.
Yes they can keep Maytag out of the market. By increasing their spending on
advertising GE will be able to prevent Maytag from entering the Market. Maytag has
a much lower profit level when GE spends $12 million on advertising. Equilibrium
comes when the company can balance the marginal costs and marginal revenues. The
advertising budget would be part of the marginal cost. GE should raise its advertising
budget and attempt to keep Maytag out of the market. The $2,000,000 would be well
spent even if it did reduce revenues by $1,500,000 if it would keep Maytag out of the
market as GE’s profit margin is higher than it would be if Maytag entered the market.