The market for tennis balls is dominated by two firms: Wilson and Penn. The research department of Wilson has discovered a new technology on how to make more durable tennis balls 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 Wilson adopts the new technology, Penn can easily copy it at a lower setup cost of C/2. If Wilson does not adopt the new technology, it will earn $10 and Penn will earn $4. If Wilson adopts and Penn does likewise, each firm will earn $30 in revenues. If Wilson adopts and Penn does not, Wilson would earn $40 in revenues while Penn would earn $0.
(a) Write this game in extensive form.
(b) Under what conditions (i.e., for what values of C) does Penn have an incentive to adopt the new technology if Wilson introduces it?
(c) If C = 24, should Wilson adopt the new technology? Explain.