Figure 14-2

The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed Internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game.
-Refer to Figure 14-2.If the government delays Gigacom's entry and Xenophone moves first, is a threat by Gigacom that it will provide DSL service if Xenophone provides cable service a credible threat?

Question

Figure 14-2
  
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed Internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game.
-Refer to Figure 14-2.If the government delays Gigacom's entry and Xenophone moves first, is a threat by Gigacom that it will provide DSL service if Xenophone provides cable service a credible threat?

Quizplus · Accepted Answer

A threat is only credible if it is in the best interest of the firm to carry it out. In this case, if Gigacom follows through with its threat to provide DSL service, it will only earn $1 million in profit, as opposed to $5.5 million if it complies with Xenophone's choice of providing cable service. Therefore, it is not in Gigacom's best interest to carry out its threat, making it not credible.

Figure 14-2 The Government of a Developing Country Plans to Award Two