Two computer firms, A and B, are planning to mar- ket network systems for office information manage- ment. Each firm can develop either a fast, high-quality system (High), or a slower, low-quality system (Low). Market research indicates that the resulting profits to each firm for the alternative strategies are given by the following payoff matrix:
Firm A Firm B
High Low
|
50, 40
|
60, 45
|
|
55, 55
|
15, 20
|
|
|
a. If both firms make their decisions at the same time and follow maximin (low-risk) strategies, what will the outcome be?
b. Suppose that both firms try to maximize profits, but that Firm A has a head start in planning and can commit first. Now what will be the outcome? What will be the outcome if Firm B has the head start in planning and can commit first?
c. Getting a head start costs money. (You have to gear up a large engineering team.) Now consider the two-stage game in which, first, each firm decides how much money to spend to speed up its plan- ning, and, second, it announces which product (H or L) it will produce. Which firm will spend more to speed up its planning? How much will it spend? Should the other firm spend anything to speed up its planning? Explain.