Firm 1 -Two Software Firms Have Developed an Identical New Software Application

question 26

Multiple Choice

Firm 1

-Two software firms have developed an identical new software application. They are debating whether to give the new application away for free and then sell add- ons, or sell the application at
$30 a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is Firm 1's best strategy?

• A) Sell the application at $30 a copy regardless of what Firm 2 does.
• B) Give away the application only if Firm 2 sells the application.
• C) Give away the application only if Firm 2 gives away the application.
• D) Give away the application regardless of what Firm 2 does.

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Definitions:

Accrued Liabilities

Expenses that have been incurred but not yet paid, recorded on the balance sheet until they are paid.

Indirect Method

A method of reporting cash flows from operating activities by adjusting net income for changes in balance sheet accounts.

Accounts Receivable

Money owed to a company by its customers for goods or services already delivered but not yet paid for.

Inventory

The complete list of items, such as raw materials, work-in-progress, and finished goods, that a company holds, which are often considered as assets.