Question

ABC Inc. and XYZ Co. are the two dominant companies providing chargers, adapters, and other accessories for cell phones. Each of these Silicon Valley companies is developing a new line of smartphone accessories, and each has a choice of technologies to use for these accessories. Each company can choose to focus on older (cheaper) technology, recent (more expensive) technology, or cutting-edge (very expensive) technology. The share each company will gain or lose in the cell-phone accessories market depends on its technology choice and the technology choice of its competitor. The choice in technology investment must be made by each company before its competitor’s choice is revealed.
ABC Inc. and XYZ Co. are both led by young, aggressive CEOs; ABC’s CEO is Jack Webster and XYZ is run by Curtis Madsen. The CEOs of ABC and XYZ are each trying to determine the best technology in which to invest. The following tables provide market share values and indifference probability values, p, for both Jack Webster (ABC) and Curtis Madsen (XYZ). Jack and Curtis have identical indifference probability values.

Market Share Gain (Loss) ..... Indifference Probability, p
25 .................... —
20 ....................0.85
15 ....................0.70
10 ....................0.58
5 ....................0.45
0 ....................0.35
–5 ....................0.27
–10 ....................0.20
–15 ....................0.12
–20 ....................0.05
–25.................... —

The following table shows the three possible technology investments (old, recent, and cutting edge) for ABC and XYZ and the resulting market share gain (or loss) for ABC, Inc.
Because ABC and XYZ are the dominant companies in this market, whatever market share is gained by ABC is lost by XYZ and vice versa.


Managerial Report
Perform an analysis of the best decision of technology investment for ABC Inc. Prepare a report you would provide to Jack Webster that summarizes your analysis and findings. Include the following:
A graph of the utility function for ABC, Inc. Explain whether you would characterize Jack Webster as a risk taker or a risk avoider and why.
Payoff tables for ABC, Inc. and XYZ, Co. using expected utilities for ABC and XYZ.
Recommendation for the best decision for ABC, Inc. and XYZ, Co. Is this a zerosum game?
Detailed calculations and analysis to support your recommendation.
A discussion of how the expected utilities would change if ABC is taken over by a more conservative, risk-avoidingfirm.


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  • CreatedDecember 30, 2013
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