Two firms compete in selling file-encryption software. Because both firms use the same encryption standard, files encrypted by one firm's software can be read by the other's, which is an advantage for consumers. Nonetheless, Firm 1 has a much larger market share because it entered the market earlier and its software has a better user interface. Both firms are now considering an investment in a new encryption standard. The two firms can either invest or not invest in this new standard. Resulting profit is given by the payoff matrix to the right.

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Sanchez

Business

8 December, 01:35

Two firms compete in selling file-encryption software. Because both firms use the same encryption standard, files encrypted by one firm's software can be read by the other's, which is an advantage for consumers. Nonetheless, Firm 1 has a much larger market share because it entered the market earlier and its software has a better user interface. Both firms are now considering an investment in a new encryption standard. The two firms can either invest or not invest in this new standard. Resulting profit is given by the payoff matrix to the right.

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Eileen Wu · Answer 1

If firm 2 decides first, it will decide to invest as the payoffs are higher if it invests regardless of what firm 1 chooses (10>0).

now, if firm 2 will invest, possible payoffs for firm 1 are;

-10 when it doesn't invest and 20 when it invests.

So, it will choose to invest.