Consider the following innovation game: Firm A must decide whether or not to introduce a new product.Firm B must decide whether or not to clone firm A's product.If firm A introduces and B clones,then firm A earns $2 and B earns $15.If A introduces and B does not clone,then A earns $8 and B earns $1.If firm A does not introduce,both firms earn profits of 0.Which of the following is true?
A) The subgame perfect Nash equilibrium profits are ($2, 15).
B) The subgame perfect Nash equilibrium profits are ($8, 1).
C) It is not in A's interest to introduce.
D) None of the preceding answers is correct.

Question

Quizplus · Accepted Answer

The subgame perfect Nash equilibrium is for firm A to introduce and firm B to clone. This is because if firm A introduces, then firm B will clone regardless of what firm A does. If firm A does not introduce, then both firms earn profits of 0. Therefore, firm A's best strategy is to introduce, and firm B's best strategy is to clone.

Consider the Following Innovation Game: Firm a Must Decide Whether