Firm 1
-Two software firms have developed an identical new software application. They are debating whether to give the new application away 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?

Question

Firm 1 
-Two software firms have developed an identical new software application. They are debating whether to give the new application away 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?

Quizplus · Accepted Answer

Looking at the payoff matrix, Firm 1's highest payoff (6) is achieved when they give away the application and Firm 2 sells the add-ons. This is the Nash equilibrium, where neither firm can improve their payoff by changing their strategy alone.

If Firm 1 chooses to sell the application at $30 a copy, their maximum payoff is only 4 if Firm 2 chooses to give away the application.

Therefore, Firm 1's best strategy is to give away the application regardless of what Firm 2 does.

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