Assignment Task:
Hypothetical Case Study:
ABC and XYZ are multinational technology corporations producing computer software and related services. Each develops their own versions of an amazing new web browser that allows advertisers to target consumers with great precision. Also, the new browser is easier and more fun to use than existing browsers. Each firm is trying to decide whether to sell the browser for certain dollar revenue or to give it away for free. Giving the browser away gets more people using it and brings in more advertising revenue, but selling it brings in a lot of revenue also. If one firm gives the browser away, the other firm will not be able to sell any because the two browsers have exactly the same features. In this event, the firm that tries to sell the browser will lose the development cost.
If both firms sell their browsers, both gain the same economic profit level. If both firms give their browsers away for free, they engage in aggressive competition and each gain low profit.
Requirement:
Find the best strategy that each firm will choose if they make their decisions independently and what are Nash equilibrium and associated payoffs of the firms? Could these two firms benefit by colluding? What is the Pareto optimum if firms collude?
Use the game theory learnt in oligopoly topic to explain your answer. Anticipate different market scenarios of two firms with two possible options (selling the browser or giving it away for free). And illustrate it by a game matrix with hypothetical numbers of pay-offs that you/your group can come up with.