Defendo has decided to introduce a revolutionary video game, and as the first in the market. In deciding what type of manufacturing plant to build, it has the choice of two technologies. Technology A is publicly available and will result in annual costs of C (the power of A) (q) = 10 +8q.

Technology B is a proprietary technology developed in Defendo's research labs. It involves higher fixed cost of production, but lower marginal costs: C(the power of B) (q) = 60 +2q

Defendo's CEO must decide which technology to adopt. Suppose Defendo expects its archrival, Offendo, to consider entering the market shortly after Defendo introduces its new product. Offendo will have access only to Technology A. If Offendo does enter the market, the two firms will play a Cournot game (in quantities) and arrive at the Cournot-Nash equilibrium. Market demand for the new product is P=20-Q, where Q is total industry output.

Explain which technology would you advise the CEO of Defendo to adopt given the threat of possible entry? Also what will be the Defendo's profit given his choice? [Hint: Draw the game tree, and solve for the equilibrium for this sequential move game.]