Firm 1 must decide which of two technologies (A or B) to pursue and develop. The firm has private information that A is potentially more profitable. The projected profit of A is $70 million; the profit from B is $30 million. Firm 1 knows that after it chooses a technology, Firm 2 will take one of two actions: (i) copy Firm 1 and pursue the same technology or (ii) pursue the alternative technology. At the time of its decision, Firm 2 will know Firm 1's choice but will not know which technology is more profitable. (As far as Firm 2 knows, it is equally likely that A or B is worth $70 million with the other worth $30 million). If only one firm develops a technology, it obtains the entire profit. If both firms pursue the same technology, each obtains half of the total profit.

1) Complete the missing profit entries in the payoff table below:

Firm 2

Firm 1 Pursue same Tech Pursue different Tech

Pursue better 35** ??**

Technology 35* ??*

Pursue worse ??** ??**

Technology ??* ??*

Please note that numbers denoted by (*) are for Firm 1's profitsc and those by (**) are for Firm 2.

2) Identify the players' optimal actions and the resulting outcome. Briefly justify your answers.

3) Would the problem posed by the firms' independent choices in part 2) be eased or worsened if Firm 2 obtained a less than 50% share of the total profit should it copy Firm 1's action? What if the two technologies had more nearly equal profit potentials?

4) Suppose the firms formed a joint venture/cartel to coordinate their technology choices. what joint actions should they take?