1) Your firm must decide whether or not to introduce a new product. If you introduce the new product, your rival will have to decide whether or not to clone it. If you don't introduce the new product, you and your rival will earn $1million each. If you introduce the new product and your rival clones it, you will lose $5million and your rival will gain $20 million (you have spent a lot on R&D and your rival will not have to spend any R&D in order to clone it). If you introduce the new product and your rival does not clone, you will make $100million and your rival will make $0. a) Draw the extensive form (the tree diagram) of this game, carefully labeling each node and outcomes associated with each action. b) Should you introduce the new product? c) How would your answer change if your rival has "promised" not to clone your product? d) What would you do if patent law prevented your rival from cloning your product?
1)
Your firm must decide whether or not to introduce a new product. If you introduce the
new product, your rival will have to decide whether or not to clone it. If you don't
introduce the new product, you and your rival will earn $1million each. If you introduce
the new product and your rival clones it, you will lose $5million and your rival will gain
$20 million (you have spent a lot on R&D and your rival will not have to spend any R&D
in order to clone it). If you introduce the new product and your rival does not clone, you
will make $100million and your rival will make $0.
a)
Draw the extensive form (the tree diagram) of this game, carefully labeling each node
and outcomes associated with each action.
b)
Should you introduce the new product?
c)
How would your answer change if your rival has "promised" not to clone your product?
d)
What would you do if patent law prevented your rival from cloning your product?
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