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Pay off matrix between Ford and GM regarding the adoption of new technology.

According to a recent article in the Wall Street Journal, side-impact crashes are among the deadliest, accounting for nearly 10,000 deaths per year. Child safety concerns have kept auto manufacturers from making side-impact airbags standards equipment, though they are optional on most middle to higher-market automobiles. Openly critical comments by General Motors Ron Zarrella that other manufacturers airbag systems inflate too powerfully and present a potential hazard to children have led to an industry wide study aimed at devising a common set of safety standards for side-impact airbag systems. Part of the trick of developing a set of standards that will protect both adults and children equally is getting the industry to agree on a single set of standards. Assume that such standards are developed and that Ford and GM most simultaneously decide whether to make side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $500.00. If both Ford and GM make side impact airbags standards equipment, each company will earn profits of $1.5 billion. If neither 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 adoption company will earn a profit of $2 billion and the other company will lose $1 billion. If you were a decision maker at GM, would you make side-impact airbags standard equipment?

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M923010

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