Two firms are considering entering the satellite broadcasting industry in a country that currently has no such service. Firm 1 has an inferior technology with fewer channels, but is ready to launch its service today. Firm 2 must wait six months for its technology to be ready. So, firm 1 has an opportunity to make its entry decision prior to firm 2. If firm 1 ends up a monopolist, its profits will be $120 million per year. If firm 2 ends up a monopolist, its profits will be $140 million per year. If both enter, severe price competition is expected, and the firms profits will be $10 million and $20 million, respectively.

These profits are all given as operating profits, not including any charge for capital. Both firms will incur $500 million in launch costs, and both value the annual opportunity cost of this capital at 10%. (This allows you to calculate all payoffs in per year terms for easy comparison. You may ignore profits earned in the interim six months by the first firm if it enters. )

1. What is the likely outcome of this game?

2. Which firm earns higher profits? Why does this particular firm win?

Suppose it were a feature of firm 1s technology that it was simple to convert the satellites to other commercial purposes. How might this change the outcome of this game? Specifically, assume that firm 1, but not firm 2, can costlessly abandon the satellite TV market after its satellites are in orbit, and instead lease its satellite capacity for annual operating profits of $40 million. If it does so and firm 2 has also entered the market, firm 2 becomes a monopolist in satellite TV.

3. What is the likely outcome of this game?

4. Which firm earns higher profits? Why?

5. What general principle does this illustrate about first-mover advantages?

6. If firm 1 could damage its own satellite in some way before its launch so that non-TV use of the satellite was impossible, would it want to? Why or why not?