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)
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 equilibrium of this game are for both
Amazon and Google based on the given strategy of each player would be
Google assistant-Alexa and Connected Home-Connected home. If Google
utilizes Google Assistant then AMazoin will obtain a gain by utilizing Alexa If
Google chooses to use Connected Home-Alexa, then Amazon will gain by using
Connected home. If one company is utilizing the exiting method and the other
is utilizing a new innovation then the consumers will prefer older technology
that they are used to. Do either both companies use the new technology or the
old technology. Nash equilibrium is defined as a long-run steadiness that is
achieved when the players of the game understand the
other companies' strategy. In the real world, companies do not attempt trial-
and-error, they would have to pick a strategy and stick with it.
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
Explanation
The normal-form representation of this game is depicted in the following payoff matrix.
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.
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
