Question: Microsoft is working on a new technology that Amazon is also interested in. Microsoft is ahead in the development process and Amazon is considering whether

Microsoft is working on a new technology that Amazon is also interested in. Microsoft is ahead in the development process and Amazon is considering whether or not to enter the competition. If Amazon stays out of the competition, it earns $0 profit, and Microsoft will enjoy a monopoly and earn a profit of $1 billion. If Amazon decides to enter the competition, developing a rival product based on this technology, then Microsoft will have to decide whether to accommodate Amazon peaceably or wage a price war. In the event of peaceful competition, each firm would earn a profit of $300 million. In the event of a price war, each will lose $100 million since the prices of the new products based on this technology will fall so low neither firm will be able to recoup its development costs.

What will each firm do?

A. Do not enter competition; engage in price war

B. Enter competition; engage in price war

C. Do not enter competition; accommodate peaceably

D. Enter competition; accommodate peaceably

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