You are the owner of Google (Player 1), a company that specializes in the production of engines for motorcycles. The management at Apple (Player 2), which is planning to produce a new motorcycle that will meet tougher government emission standards, approaches you and asks whether your firm would be willing to produce a new engine that meets the tougher standards. After many discussions and project analysis, you work out that the production of the requisite number of new engineswill require an investment of $14million. Apple offers to pay you $20 million for satisfactory production and delivery of the engines, and Apple expects to reap additional revenues of $40 million if it obtains the engines from Google.

The question is whether you sign the contract and invest in the production of these engines or refuse the contract offer. In thinking this through, you realize that your interaction with Apple has a strategic component. By signing the contract with Apple, you will be committing to the production of a highly specialized product, which you would only be able to sell to another motorcycle manufacturer for $5 million. You also realize Apple is a big, politically-influential company that can hire lawyers who will be able to renegotiate the contract after you have made your investment. (Those sneaky lawyers can argue that the quality of the delivered engines was sub par.)Consequently, Apple can choose either to abide by the contract or renegotiate the contract after you have made your investment. If Apple chooses to renegotiate, they will insist on paying only $5 million for the engines, because that is your next-best alternative.

1. How much profit will Google earn if it signs the agreement (and produces the engines) assuming that Apple abides by the agreement?

2. What is Googles profit if Apple renegotiates after Google makes the $14million investment?What is Apple's profit in those two circumstances

3.Sketch the game in extensive form

Answer rating: 100% (QA)

1 If Apple abides by the agreement Google will earn a profit of 6 million 20 million for the engines ... View the full answer