Two firms dominate the market for surgical sutures and compete aggressively with respect to research and development. The following payoff table depicts the profit implications of their different R&D strategies.
a. Suppose that no communication is possible between the firms; each must choose its R&D strategy independently of the other. What actions will the firms take, and what is the outcome?
b. If the firms can communicate before setting their R&D strategies, what outcome will occur? Explain.
Firm A's R&D Spending
Low = (8, 11), (6, 12), (5, 14)
Medium = (12, 9), (8, 10), (6, 8)
High = (11, 6), (10, 8), (4, 6)
Firm B's R&D Spending
Low = (8, 11), (12, 9), (11, 6)
Medium = (6, 12), (8, 10), (10, 8)
High = (5, 14), (6, 8), (4, 6)