Question

Two firms dominate the market for ski equipment and compete aggressively with respect to R&D. The...

Two firms dominate the market for ski equipment and compete aggressively with respect to R&D. The following payoff table depicts the profit implications of their different R&D strategies.

                      

Firm’s B R&D spending

Small

Medium

Large

Small

8, 11

6, 12

5, 14

Firm’s A R&D

Medium

12, 9

8, 10

6, 8

spending

Large

11, 6

10, 8

4, 6

a/ Suppose that no communication is possible between the firms; each must choose its R&D strategy independently of the other. What actions will the firms take, and what is the outcome?

b/ If the firms can communicate before setting their R&D strategies, what outcome will occur? Explain.

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