You are currently the only producer of a specialized computer chip used in computer animation, the Quadrino, but are concerned that your success might attract competitors. You are now considering a major investment in capacity that would reduce your marginal cost below that of any potential rival. The impact of the investment on your strategic position is summarized as follows: If you do not make the investment, you expect to make $20m if competitors enter, and $50m if they do not. Your potential competitors, on the other hand, expect to make $10m if they enter, nothing if they do not. If you do make the investment, you expect to make $10m net of the investment if competitors enter, and $40m if they do not. Your potential competitors, on the other hand, expect to lose $2m if they enter, nothing if they do not. All payoffs are total discounted values. Moreover, it is common knowledge that competitors will not enter for a while, certainly not before they have observed whether Quadrino has made the investment.

(a) Describe the game played by Quadrino and the potential entrant.

(b) Find the equilibrium of the game.