Y6

As you may know, the future of electric cars is heavily dependent on the development of efficient and inexpensive batteries. Let's say there are two companies competing in the market for batteries, ABC and XYZ. Currently, each of them earns a steady stream of profit worth $3 billion in present value. ABC thinks it knows how to make a better battery but commercializing their idea requires a one-time lump-sum investment of size C. ABC also knows that if they do that, then it won't be hard for XYZ to copy their idea and start implementing it at half that cost (so, C/2). If ABC remains the only firm in possession of this technology, then the present value of its operating profit stream increases to $8 billion whereas XYZ's stream of profits will be worth $2 billion in present value. These profit figures are before the investment expenses, if any, are subtracted. If both firms adopt the technology, then both of their profit streams would increase compared to today, but remain equal to each other, each being worth $5 billion in present value. Once again, this figure does not account for the investment expense each firm would need to make. a. (2.5 pts) Draw a game tree to present this situation as a sequential-move game. Make sure all the nodes and branches are properly labeled! Don't forget to include parameter C in your payoffs. b. (1.5 pts) What is the most likely outcome of the game if C = $1 billion? c. (1.5 pts) What is the most likely outcome if C = $3 billion? d. (2.5 pts) State the range of values for C that would make the investment in the new technology worthwhile for ABC.