Two Grocery Stores Compete Against Each Other in a Community

Essay

Two grocery stores compete against each other in a community. Both are considering an increase in advertising expenditures. Their interdependent alternatives are described by the payoff matrix.
$$\begin{array} { | l | l | l | l | } \hline & & { \text { Firm 2 } } \\\hline & & \text { Advertise } & \text { Don't Advertise } \\\hline { \text { Firm 1 } } & \text { Advertise } & ( 7,7 ) & ( 4,8 ) \\\hline & \text { Don'tAdvertise } & ( 1,1 ) & ( 5,4 ) \\\hline\end{array}$$ (i) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(ii) Determine the optimal strategy for each firm.
(iii) Determine the Nash equilibrium.
(iv) Is this a prisoners' dilemma? How do you know?