Our old friends, the BehaviorBot and Jungermeister, are in a two-period competition. In the first period all is as before: The BB has an accuracy of .95, and it costs BB $10 to process a case. The JM has an accuracy of .99, the buyer additionally incurs a labor cost of $10 to input the data, and it costs JM $85 to process a case. Mistaken diagnoses cost the buyer $3000 each. In this situation, JM has a competitive advantage of $35/case. In the second period, each firm's accuracy improves based on the number of cases it processes (getting feedback on outcomes). Let x = the number of Period 1 cases a firm processed. Then suppose a firm i's accuracy in Period 2, pi2 is equal to its Period 1 accuracy, pi1, plus one-half of x/(1+x) times the gap between pi1 and perfect accuracy (perfection would be a probability of one): Pi2 = pi1 + (1/2)*(x/(1-x))*(1- pi1). The 1/2 is there to limit the rate of learning in a market of reasonable size—the fastest a firm could improve its accuracy is halfway to perfection (if it had an infinite number of cases). Now note that the total size of the Period 1 market is 10,000 cases and that xBB + xJM = 10,000. Neither firm exits the market even if it were to get zero share in Period 1 (either there are no recurring fixed costs, so no incentive to exit, or we are only looking at one market segment and the firms always have positive market share in other segments). If the two firms engaged in tough price competition in Period 1, with neither firm considering the consequences for Period 2, then JM's competitive advantage in Period 2 would be approximately

 

a) $10/case 

b) $20/case 

c) $30/case 

d) $40/case

e) $50/case 

 

9. If BehaviorBot played in Period 1 with an eye to profits in both periods (pursued data dominance, even if it meant losing money in Period 1, provided the expected profit in Period 2 would make up for it), while Jungermeister continued to be myopic in Period 1, then in Period 2 

a) Everything would be unchanged from the previous question because data dominance doesn't pay. 

b) BB would capture the whole market in both periods and earn a net total of about $10,000 

c) BB would capture the whole market in both periods and earn a net total of about $30,000 

d) BB would capture the whole market in both periods and earn a net total of about $50,000 

e) BB would capture the whole market in both periods and earn a net total of about $70,000 

 

10. If both firms considered data dominance strategies in Period 1 and engaged in tough price competition (potentially accepting losses in Period 1 if they could be recouped in Period 2 via data dominance), then 

a) Everything would be unchanged from the previous two questions because data dominance doesn't pay. 

b) BB would capture the whole market in both periods and earn a total of about $5000 

c) JM would capture the whole market in both periods and earn a total of about $250,000 

d) JM would capture the whole market in both periods and earn a total of about $350,000 

e) JM would capture the whole market in both periods and earn a total of about $450,000