Suppose the Market for Computer Chips Is Dominated by Two

question 30

Essay

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.

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Definitions:

Double Pay

Double pay refers to the practice of paying an employee twice their normal wage rate, typically for working on holidays, overtime, or under special conditions.

Net Pay

The amount of money that an employee actually receives after all deductions, such as taxes and retirement contributions, have been subtracted from their gross pay.

Gross Pay

The total amount of salary or wages earned by an employee before any deductions are made for taxes and other withholdings.

Take-Home Pay

The amount of income left after deductions like taxes and social security contributions are subtracted from the gross salary.