Suppose that GE is trying to prevent Maytag from entering themarket for high efficiency clothes dryers. Even though highefficiency dryers are more costly to produce, they are also moreprofitable as they command sufficiently higher prices fromconsumers. The following payoffs table shows the annual profits forGE and Maytag for the advertising spending and entry decisions thatthey are facing.
| GE |
MAYTAG | | Advertising = $12m | Advertising = $0.7m |
Stay Out | $0, $30m | $0, $35m |
Enter | $1m , $20m | $12m, $15 |
Based on this information, can GE successfully prevent Maytagfrom 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 littlebit more advertising by GE, say another $2m, would be sufficient todeter enough customers from buying Maytag, thus, yield less than $0profits for Maytag in the event it enters. Suppose that spending anextra $2m on advertising by GE will reduce its expected profits by$1.5 m, regardless of whether Maytag enters or stays out. Wouldthis additional spending on advertising achieve the effect ofdeterring Maytag from entering? Should GE pursue this option?
