1 20 points Two companies A and B are operating in an oligop

1. (20 points) Two companies, A and B, are operating in an oligopolistic market and are about to introduce a new product, each with their own format. Assume that each company will simultaneously decide whether to synchronize format and also whether to use freemium revenue model or direct subscription revenue model Freemium model requires an investment (COST) of $10 million and subscription model requires $5 million in case of Synchronization. Otherwise costs double. Note that, for a Synchronized product in the market, both companies need to choose to synchronize. The first table below summarizes the REVENUE for each company depending on their choice of revenue model in case they both choose to synchronize and the second table summarizes the similar information when at least one decides not to synchronize (all numbers are in million ): SYNC FORMAT: Firm B Subscription Freemium 10,70 Subscription 68,68 Freemiunm Firm A 70,10 35,35 NO SYNC FORMAT: Firm B Subscription Freemium Subscription 42,42 12,50 Firm A Freemium 45,14 20,20 What is the best decision for each company in terms of synchronization and revenue model given that each wants to maximize PROFIT, neither knows exactly what the other will do but each knows the above two tables?

Solution

As per the tables given above, both the firm without knowing what the other firm is doing will try to earn a maximum revenue. To do so they will go to Sync format (both of them) and provide their services as freemium.

If both the firms are going for the subscription in Sync Format they will earn a profit of 68 each. But even if one single firm deviates unilaterally to freemium they will get a return of 70. Knowing that the firms have the incentive to deviate they will deviate unilaterally and end up getting 35 each.

From that firm, no firm can unilaterally deviate or its return will be even lower. SO the Nash equilibrium, in this case, will be both the firm going to Sync Format and Freemium service.