Apple and Samsung are currently selling 4G enabled phones and earning a profit of USD 10...

Apple and Samsung are currently selling 4G enabled phones and earning a profit of USD 10 billion and USD 7 billion respectively. If Apple and Samsung both introduce 5G enabled phones, the R&D costs would bring down their profits to USD 8 billion and USD 5 billion respectively. If Apple introduces 5G enabled phones but Samsung doesn't, it sweeps the market of premium smartphones and earns a profit of USD 15 billion but Samsung makes a humble profit of only USD 2 billion. Similarly if Samsung introduces 5G enabled phones but Apple doesn't, it sweeps the premium smartphone market and earns a profit of USD 12 billion but Apple loses customers and hence makes only USD 3 billion in profit.
a. Create the payoff matrix and attach an image of the same in pdf format. The remaining answers to be typed in the box provided.
b. Identify the dominant strategy for Apple.
c. Identify the dominant strategy for Samsung.
d. What would be the Nash equilibrium?

Expert Solution

a.

	Samsung: 4G	Samsung: 5G
Apple: 4G	USD 10 billion; USD 7 billion	USD 3 billion; USD 12 billion
Apple: 5G	USD 15 billion; USD 2 billion	USD 8 billion; USD 5 billion

(Left side payoffs are of apple and right side payoffs are of samsung.)

b. Given that Samsung choose 4G, Apple's best response is to do R&D and introduce 5G(15).
Given that Samsung choose to do R&D and introduce 5G, Apple's best response is to do R&D and introduce 5G(8).
So, Apple's dominant strategy is to do R&D and introduce 5G as it is always its best response.

c. Given that Apple choose 4G, Samsung's best response is to do R&D and introduce 5G(12).
Given that Apple choose to do R&D and introduce 5G, Samsung's best response is to do R&D and introduce 5G(5).
So, Samsung's dominant strategy is to do R&D and introduce 5G as it is always its best response.

d. The Nash equilibrium is (5G, 5G) = (USD 8 billion; USD 5 billion) as best response of both occurs simultaneously when they both do R&D and introduce 5G.

Rahul Sunny answered 2 years ago

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