Suppose Yamaha and Hero must decide whether to make a new style of side-impact airbags standard...

Suppose Yamaha and Hero must decide whether to make a new style of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $1,000. The company will earn profits of $2 billion each if they make the airbags. If neither company adopts the technology, each company will earn $3.5 billion. If one company acquire the technology and the other does not, the adopting company will earn a profit of $4.5 billion and the non-acquiring company will earn $0.5 billion.

a. If a decision is to be made for Hero, should the side-impact airbags standard equipment be made?

b. If Yamaha and Hero were able to cooperate, is this expected to bring the same outcome?

Expert Solution

a) If Yamaha chooses to make the side impact airbags standard equipment, then Hero would also choose to make the side impact airbags standard equipment.

If Yamaha chooses not to make the side impact airbags standard equipment, then also Hero would also choose to make the side impact airbags standard equipment.

So, we can see that Hero has a dominant strategy to make the side impact airbags standard equipment.

So, if a decision is to be made, Hero should choose to make the side impact airbags standard equipment.

b) If Yamaha and Hero were able to cooperate then the outcome would not be same. If both the companies, Yamaha and hero cooperate with each other, they would look to make a decision that would maximise their total profits. So, the companies would decide not to make the side impact airbag is standard equipment as if both the companies do so, they will be having a greater profits.

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Rahul Sunny answered 2 years ago

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