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Item 10

8 points

Item 10

Both Google and Amazon are major players in the smart home market, using their own internally developed smart home control system (Google Assistant and Alexa, respectively). Suppose each is considering a new round of investments into their smart home offerings, which could build on their in-house system or be tailored to a new open source standard system, called Connected Home. Google estimates that it will cost $1.2 billion to build on Google Assistant and $2.0 billion to move to Connected Home. Amazon's projected cost of building on Alexa is $1.1 billion, while the cost of moving to Connected Home is $2.7 billion. As shown in the accompanying table, each company's projected revenues depend not only on the technology it uses, but also on the technology used by its rival.

Projected Revenues for Different Combinations of Smart Home Technologies (in billions)

Technologies (Google-Amazon)	Google's Revenues	Amazon's Revenues
Google Assistant-Alexa	$12.1	$13.5
Google Assistant-Connected Home	$12.1	$11.6
Connected Home-Alexa	$9.8	$13.5
Connected Home-Connected Home	$16.2	$18.3

Determine the Nash equilibrium/equilibria of this game. Then, explain the economic forces that give rise to the structure of the payoffs and any difficulties the companies might have in achieving Nash equilibrium in the new market.