The way to solve these games is to work backwards, (what game theorists like to call backwards induction because it sounds so much more intelligent that "work backwards"). We start with the choices facing the last player, in this case Firm 2 and ask what she would do.

   If Firm 2 found itself at the upper node of the game it has the choice of introducing a New Product and obtaining a payoff of 4 or marketing its Old Product for a payoff of 2. Clearly in this case it would introduce the New Product At the lower node Firm 2 will earn a payoff of 9 if it introduces the New Product but only 7 if it markets the Old Product.

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