Answer to Question #140481 in Microeconomics for Kris

Question

Suppose Toyota and Honda must decide whether to make a new breed of side
impact airbags standard equipment on all models. Side-impact airbags raise the price
of each automobile by $500. If both firms make side-impact airbags standard
equipment, each company will earn profits of $1.5 billion. If neither company adopts
the side-impact airbag technology, each company will earn $0.5 billion (due to lost
sales to other automakers). If one company adopts the technology as standard
equipment and the other does not, the adopting company will earn a profit of $2
billion and the other company will lose $1 billion. If you were a decision maker at
Honda, would you make side-impact airbags standard equipment? Explain.

Answer 1

 From this case, Toyota and Honda firms are expected to make side-impact airbags standard equipment. The two firms compete, so none is willing to be left out in introducing the new technology in production.

The primary reason for incorporating the new technology technique is because it adds an advantage of the involved firms over other competitors. If the method has been proven to improve productivity and hence maximize the profits, the firms will adopt it. Therefore if the two firms fail to use this technique, profits might reduce. Consequently, no firm is willing to operate without new technology.

Furthermore, if one firm adopts the technique, the competitor will also do it to prevent the other competitor from gaining a competitive advantage over the other firm. Therefore the other firm will be on the route to implement the technique also thus leaving us with one option of all the firms will adopt the strategy and technique and gain $1.5 billion from the sales.