Consider the following situation: Sony and Samsung are contemplating the development of UltraSmartHD Television. Sony is estimating that it will take them two years to complete & costs $500M to complete, with $250M spent during the first year and $250M spent during the second year. For Samsung, the project will also take two years but costs $600M to complete (with costs $300M in year 1 and $300 in year 2). If both Sony and Samsung end up developing the new television, competition will have a negative effect on the profitability of the project, with Sony expecting to earn $300M and Samsung expecting to earn $500M (excluding the development costs). If Sony is the only company developing the new TV, they expect to earn $800M while Samsungs profits are unaffected, while if Samsung is the only company developing the new TV, they expect to earn $1.1Bn while Sonys profits are unaffected. If a company decides to develop the project, the first years expenditure becomes sunk. However, each firm can revise their decision in a years time before the next step of the development needs to take place (and you cannot commit to the whole expenditure immediately). Sony is ready to make the decision now, while Samsung is a little behind and meeting next quarter to make the same decision regarding their development efforts. As a result, you can view this as a sequential-move game, where Sony first decides whether to begin development, followed by Samsung, after which Sony decides whether to complete development (year 2), followed by Samsung, with the previous actions known by the players when making their current choices.

• Draw the game tree that captures the game described above and find the (subgame-perfect) Nash equilibrium of the game.
• What will Sony do when deciding on completing the development (year 2) if both Sony and Samsung decided to begin development in year 1? What would Sony do in year 1 if it expected Samsung to also begin development? Why are your answers different?