Suppose that U.S.-based Qualcomm and European-based T-Mobile are contemplating i

Question

Suppose that U.S.-based Qualcomm and European-based T-Mobile are contemplating infrastructure investments in a developing mobile telephone market. Qualcomm presently uses a code-division multiple access ( CDMA) technology, which almost 67 million users in the U.S. 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
$ 900 million to install its CDMA technology and $ 1.8 billion to install GSM technology.T-Mobile's projected cost of installing GSM technology is $ 950 million, while the cost of installing the CDMA technology is $2.5 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.


                     Projected Revenues for Different Combinations of Mobile
                                         Technology Standards ( in billions)
          Standards                       Qualcomm's                        T-Mobile's
 (Qualcomm-T-Mobile)                 Revenues                          Revenues
  CDMA-GSM                                   $12.9                                $ 8.95
  CDMA-CDMA                                 $16.9                                $14.5
  GSM-CDMA                                   $15.8                                $ 9.5
  GSM-GSM                                     $14.8                               $ 18.95

Construct the normal form of this game. Then explain the economic forces that give rise to the structure of the payoffs and any difficulties that the companies might have in achieving Nash equilibrium in the new market.

Explanation / Answer

T-Mobile

CDMA GSM

CDMA 16.9/14.5 12.9/8.95

Qualcomm

GSM 15.8/9.5 14.8/18.95

Payoffs to (Qualcomm/T-mobile)

Not the best since none of the tables or drawing options wanted to work, but there it is. The structure of the payoffs comes from the fact that each company has its own set of standards in place. It is therefore less expensive for it to implement on that platform rather than switching to another. However, there is also an advantage to both industries adopting the same platform since customers with one company would like to be compatible with customers with another. Of course, neither one wants to be the one to make the switch.

There are two Nash equilibria. One at CDMA/CDMA and on at GSM/GSM. Once at one of these points, neither has an incentive to switch. Of course with each company achieving higher profits under "their" standard, one of them will technically be worse off at the other standard than they would be under their own (but still better off than with both companies using different standards). How it is decided who takes the hit so to speak will be the challenge in determining which Nash Equilibirium is reached.

(possible solution. T-Mobile receives 4.45 B more under GSM/GSM than CDMA/CDMA. Qualcomm receives only 2.1 B more under CDMA/CDMA. T-Mobile could compensate Qualcomm by giving them 2.1 B and still come out 2.35 B better off than under CDMA/CDMA and with this compensation Qualcomm should be indifferent between the standards)

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