Refer to Figure 14-8 Use the decision tree to determine whether Microsoft should deter Toshiba from entering the market for electronic book readers (e-readers). Assume that each firm must earn a 20% return on investment to break even

Explain Microsoft's decision process.

If Microsoft charges $249 for its e-reader, Toshiba will not enter the market because the rate of return represents an economic loss. If Microsoft charges $99, Toshiba will enter the market because it will earn a return that represents an economic profit. Because these low prices will substantially increase the market for e-readers, Microsoft will actually earn a higher return of 32%, splitting the market with Toshiba at a lower price than it would have earned having the market to itself at the higher price. In this case, charging a lower price has a higher payoff for Microsoft, even given that Toshiba will enter the market.