Question 3: Game Theory of Oligopoly

Hypothetical Case Study:

ABC and XYZ are multinational technology corporations producing computer software and related services. Each develops their own versions of an amazing new web browser that allows advertisers to target consumers with great precision. Also, the new browser is easier and more fun to use than existing browsers. Each firm is trying to decide whether to sell the browser for a certain dollar revenue or to give it away for free. Giving the browser away gets more people using it and brings in more advertising revenue, but selling it brings in a lot of revenue also. If one firm gives the browser away, the other firm will not be able to sell any because the two browsers have exactly the same features. In this event, the firm that tries to sell the browser will lose the development cost.

If both firms sell their browsers, both gain the same economic profit level. If both firms give their browsers away for free, they engage in aggressive competition and each gain low profit.