The new widget production process that firm 1 is developing is equally likely to have high cost or low cost Firm 1 will learn whether its production cost is high or low at the beginning of next year Then firm 1 can choose whether to build a new factory or not Firm 2 will not be able to observe firm 1s production cost but firm 2 will be able to observe whether firm 1 builds a new factory or not Firm 2 will subsequently decide whether to enter the widget market or not Firm 2 will earn 2 million in present discounted value of longrun profits from entering the widget market if firm 1s production cost is high but firm 2 will lose 4 million from entering if firm 1s production cost is low These payoffs are relative to a payoff of 0 to firm 2 if it does not enter Let a payoff of 0 to firm 1 denote its profit if new cost is high firm 1 does not build and firm 2 does not enter Lower costs in the new process will increase firm 1s profit by 4 million ceteris paribus Building a new factory would add 2 million more to firm 1s profit if the new process has low cost because conversion to the new process would be easier in a new factory but building a new factory would subtract 4 million from firm 1s profit if the new process has high cost In any event firm 2s entry into the widget market would reduce firm 1s profit by 6 million Both firms are risk neutral