Two rival communications companies (Alpha and Beta) are both considering bringing out a revolutionary 8G wireless technology. Unfortunately, the costs of development are so high that the potential market could only support one firm. Both companies understand these possible outcomes. If one firm enters the 8G market and the other does not, the entering firm will receive $500 billion in profits over the next 5 years; the other firm will receive $100 billion over the same 5 years (by concentrating on their current 5G service). If neither enters the 8G field, they can both expect to receive $75 billion over the 5-year period, as they fight over the 5G market. Lastly, if both enter the 8G market, each will end up suffering a $50 billion loss over the same 5 years. Use a game table with “ENTER” and “STAY OUT” to decide each player’s options and the payoffs. Explain why each company has a strong reason to want to announce its intentions before the other company announces theirs.
Two rival communications companies (Alpha and Beta) are both considering bringing out a revolutionary 8G wireless technology. Unfortunately, the costs of development are so high that the potential market could only support one firm. Both companies understand these possible outcomes. If one firm enters the 8G market and the other does not, the entering firm will receive $500 billion in profits over the next 5 years; the other firm will receive $100 billion over the same 5 years (by concentrating on their current 5G service). If neither enters the 8G field, they can both expect to receive $75 billion over the 5-year period, as they fight over the 5G market. Lastly, if both enter the 8G market, each will end up suffering a $50 billion loss over the same 5 years. Use a game table with “ENTER” and “STAY OUT” to decide each player’s options and the payoffs. Explain why each company has a strong reason to want to announce its intentions before the other company announces theirs.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Two rival communications companies (Alpha and Beta) are both considering bringing out a revolutionary 8G wireless technology. Unfortunately, the costs of development are so high that the potential market could only support one firm. Both companies understand these possible outcomes. If one firm enters the 8G market and the other does not, the entering firm will receive $500 billion in profits over the next 5 years; the other firm will receive $100 billion over the same 5 years (by concentrating on their current 5G service). If neither enters the 8G field, they can both expect to receive $75 billion over the 5-year period, as they fight over the 5G market. Lastly, if both enter the 8G market, each will end up suffering a $50 billion loss over the same 5 years.
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- Use a game table with “ENTER” and “STAY OUT” to decide each player’s options and the payoffs.
- Explain why each company has a strong reason to want to announce its intentions before the other company announces theirs.
- Use a game table with “ENTER” and “STAY OUT” to decide each player’s options and the payoffs.
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