Advertising
Some economists and others believe that persuasive advertising may be largely wasteful. Here is an example that illustrates what they have in mind. We consider two whiskey manufacturers, one selling Black George brand, and the other selling Wild Chicken brand whiskey. If they advertise, they can sell more whiskey, and the larger market will give them both more revenues -- but the cost of advertising more than offsets the increased revenues, so that profits are slightly less. On the other hand, if only one advertises, he takes most of the customers and gets a large profit. Here is the payoff table:
Table 5
| | | Black George |
| | | advertise | don't |
| Wild Chicken | advertise | 40,40 | 110,10 |
| don't | 10,110 | 50,50 |
Once again, we see an outcome like the Prisoners' Dilemma: if each seller takes the other seller's decision as given, then they both advertise, and their profits are lower as a result. Again, as in the Prisoners' Dilemma example, we can contrast a cooperative solution with this noncooperative solution. A cooperative solution to the advertising game would be one in which the whiskey-sellers coordinate their strategy for mutual benefit.
We get these Prisoners'-Dilemma-like results because of the way the payoffs are interrelated. Other payoff assumptions might lead to a quite different analysis. We should stress that this is an hypothesis, not a fact. Some economists believe that advertising is often wasteful, and explain their opinion by this Prisoners'-Dilemma-like sort of reasoning. But, so far as evidence is concerned, the jury is still out. We don't know whether advertising is a "Prisoners' Dilemma" or not.
The value of game theory, in a case such as this, is not that it answers the questions but that it enables us to ask them more precisely and clearly. That's helpful, and is a step on the way to getting the answer.
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