Determine the Nash equilibrium/equilibria of this game. Then,
explain the economic forces that give rise to the structure of the
payoffs and any difficulties the companies might have in achieving
Nash equilibrium in the new market.
EssayEdit Unavailable.The Nash equilibria pairs are (Google
Assistant, Alexa) and (Connected Home, Connected Home). The
possible strategy pairs are: If Google uses Google assistant, then
Amazon will gain by using Alexa. If Google uses Connected Home,
then Amazon will gain by using Connected Home. If Amazon uses
Alexa, then Google will gain by using Google Assistant. If Amazon
uses Connected Home, then Google will gain by using Connected
8
Both Google and Amazon are major players in the smart home
market, using their own internally developed smart home control
system (Google Assistant and Alexa, respectively). Suppose each is
considering a new round of investments into their smart home
offerings, which could build on their in-house system or be tailored
to a new open source standard system, called Connected Home.
Google estimates that it will cost $1.2 billion to build on Google
Assistant and $2.0 billion to move to Connected Home. Amazon’s
projected cost of building on Alexa is $1.1 billion, while the cost of
moving to Connected Home is $2.7 billion. As shown in the
accompanying table, each company’s projected revenues depend
not only on the technology it uses, but also on the technology used
by its rival.
Projected Revenues for Different Combinations of Smart
Home Technologies (in billions)
Technologies (Google-Amazon)
Google's
Revenues
Amazon's
Revenue
s
Google Assistant-Alexa
Google Assistant-Connected
Home Connected Home-Alexa
Connected Home-Connected
Home
$12.1
$12.1
$9.8
$16.2
$13.5
$11.6
$13.5
$18.3
Home. Nash equilibrium is a long-run steady state and is achieved
when players play and get to know each others strategy. However in
market players innovate and do not make trial and error to arrive at
the steady state. So competing companies will have to decide all the
strategies to choose. However asymmetric information among
players (e.g., Google and Amazon) may lead to failure of market to
arrive at Nash equilibrium.
Explanation
There are two Nash equilibria to this coordination game: (1) Google and Amazon each
use their own technology and (2) Google and Amazon adopt the Connected Home
technology. There are many ways to solve multiplicity of equilibria in this coordination
problem. For example, as the book points out, the firms could “talk” to each other and
agree on using the same technology.
The normal-form representation of this game is depicted in the following payoff matrix.
AlexaConnected Home
Google Assistant$12.1 b, $13.5 b$12.1 b, $11.6 b
Connected Home$9.8 b, $13.5 b$16.2 b, $18.3 b
Goog
le
Strategies
Amazon
