Suppose Procter & Gamble (PG) and Johnson & Johnson (JNJ)...

Suppose Procter \& Gamble (PG) and Johnson \& Johnson (JNJ) are simultaneously considering new advertising campaigns. Each firm may choose a high, medium, or low level of advertising. What are each firm's best responses to its rival's strategies? Does either firm have a dominant strategy? What is the Nash equilibrium in this game?

Key Concepts

Best Response

A best response is the optimal strategy a player can choose given their opponent’s strategy. In game theory, it represents the choice that maximizes a player's payoff when the rival’s actions are held fixed, and understanding this concept helps in analyzing how players adjust their strategies based on expectations about what others will do.

Dominant Strategy

A dominant strategy is one that yields a higher payoff for a player regardless of the opponent’s actions. When a player has a dominant strategy, they have a clear best option independent of their competitor's choices, making the strategic analysis simpler because that option always outperforms alternatives.

Nash Equilibrium

A Nash equilibrium is a set of strategies where no player has an incentive to unilaterally deviate, out of the set, because doing so would not lead to a higher payoff. It represents a stable outcome in a strategic setting where each player's choice is optimal, given the choices of others, and is foundational in predicting the outcome of strategic interactions.

Simultaneous-Move Game

In a simultaneous-move game, all players choose their strategies at the same time without knowledge of the others' choices. This setting requires players to form beliefs or expectations about their opponents' strategies, which is crucial in determining best responses, potential equilibria, and overall strategic behavior.

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