Question

Suppose the market for computer chips is dominated by two firms: Intel and AMD. Intel has discovered how to make superior chips and is considering whether or not to adopt the new technology. Adoption would entail a fixed setup cost of C but would increase revenues. However, if Intel adopts the new technology, AMD can easily copy it at a lower setup cost of C/2. If Intel adopts and AMD does not, Intel would earn $20 in revenues while AMD would earn $0. If Intel adopts and AMD does likewise, each firm will earn $15 in revenues. If Intel does not adopt the new technology, it will earn $5 and AMD will earn $2. a. Write this game in extensive form. b. Under what conditions (i.e., for what values of C) does AMD have an incentive to adopt the new technology if Intel introduces it

Answer 1

Step-by-step explanation:

See the figure below.

b. AMD's payoff from adopting must exceed its payoff from not adopting. This is true if 15 - C/2 > 0. Solving for C, we find that AMD has an incentive to adopt if Intel adopts whenever C < 30.

c. No. When C = 12, AMD's best strategy is to adopt if Intel adopts, which means Intel would earn only 3by adopting. By not adopting, Intel can earn a payoff of 5; Intel's best option is not to adopt. This is the only Nash equilibrium, and it is also a subgame perfect Nash equilibrium