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# Game Theory

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?

c.If C = 12, should Intel adopt the new technology? Explain

#### Solution Preview

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 ...

#### Solution Summary

Consider if the company should adopt the new technology in this case.

\$2.19