Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 21

Suppose that U.S.-based Qualcomm and European-based T-Mobile are contemplating infrastructure investments in a developing mobile telephone market. Qualcomm currently uses a code-division multiple access (CDMA) technology, which almost 67 million users in the United States utilize. In contrast, T-Mobile uses a global systems for mobile communication (GSM) technology that has become the standard in Europe and Asia. Each company must (simultaneously and independently) decide which of these two technologies to introduce in the new market. Qualcomm estimates that it will cost $1.2 billion to install its CDMA technology and $2.0 billion to install GSM technology. T-Mobile's projected cost of installing GSM technology is $1.1 billion, while the cost of installing the CDMA technology is $2.7 billion. As shown in the accompanying table, each company's projected revenues depend not only on the technology it adopts, but also on that adopted by its rival.

Construct the normal form 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.