3.10 Salgado (2008) found that AMD’s cost of manufacturing computer chips was about 12% higher than Intel’s cost because AMD had less learning by doing (Chapter 7) as it had produced fewer units.

The more an incumbent firm produces in the first period, the lower its marginal cost in the second period. If a potential entrant expects the incumbent to produce a large quantity in the second period, it does not enter. Draw a game tree to illustrate why an incumbent would produce more in the first period than the single-period profit-maximizing level. Now change the payoffs in the tree to show a situation in which the firm does not increase production in the first period. (Hint: See Solved Problem 14.3.)