After you have studied Economics in the News on pp. 402–403, answer the following questions.

a. What are the strategies of AT&T and Verizon in the market for wireless Internet service?

b. Why, according to the news article, are the three firms investing heavily in 5G service?

c. Why wouldn’t Verizon stick with its 4G network and leave AT&T to incur the cost of establishing 5G service?

d. Could one of the firms do something that would make it the market leader? Would that action maximize its profit?

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The U.S. market for wireless Internet service is dominated by three firms: AT&T, Verizon, and T-Mobile. Figure 1 shows the market shares. You can see that AT&T has 45 percent of the market; Verizon has 29 percent; and T-Mobile 25 percent. U.S. Cellular has the remaining 1 percent. Starting in 2019, AT&T, Verizon, and T-Mobile invested heavily in a 5G network. In 2020, all three firms had expanding 5G coverage despite the fact that consumers were showing limited interest in buying the higher-priced faster service. We can interpret the investment in 5G as a prisoners' dilemma game. We'll illustrate this game as one between only two players, but the real-world game with three players has a similar outcome. Table 1 shows the payoff matrix (billions of dollars of profit) for the game played by AT&T and Verizon. (The numbers are hypothetical.) This game is a prisoners' dilemma like that on p. 387 and has a dominant-strategy Nash equilibrium. If AT&T invests in 5G, Verizon avoids zero profit by invest- ing in 5G; and if AT&T does nothing different (no change), Verizon makes a profit by investing in 5G and gaining market share. So Verizon's best strategy is to invest in 5G. If Verizon invests in 5G, AT&T avoids zero profit by invest- ing in 5G; and if Verizon doesn't invest in 5G (no change), AT&T makes a profit by investing in 5G. So AT&T's best strategy is to invest in 5G. Because the best strategy for both AT&T and Verizon is to invest in 5G, that is the equilibrium of the game. The firms are in a prisoners' dilemma because each would be better off avoiding investing in 5G until consumer demand is stronger. But each firm can see that if it doesn't take its best action, then the other firm will gain and it will lose. A similar game to the one we've just described between AT&T and Verizon is also played between AT&T and T-Mobile and between T-Mobile and Verizon. In each game, the Nash equilibrium is for all players to invest in 5G. Firms like Amazon and Apple that create uses for 5G will be the biggest winners from this investment.