Consider the following two-stage game between an incumbent firm, I, and a potential entrant, E. The...
Consider the following two-stage game between an incumbent firm,
I, and a potential entrant, E. The strategy sets of E and I each
have two possible actions. The strategy set of E, denoted SE =
{enter, stay out} while the strategy set of I, denoted SI = {fight
if the entrant enters, accommodate if the entrant enters} where
‘accommodate’ means ‘do not fight’. If E stays out, I’s profit if
$50 million and E’s profit is $5 million. If E enters and I
accommodates E’s entry, both would have a profit of $20 million. If
E enters and I fights, the profit for each firm would be $1
million.
a) Use a decision tree to depict this game.
b) Identify the two Nash equilibrium pairs of
strategies.
c) Explain why only one of the Nash equilibrium pairs
of strategies is sensible, and explain why the second one is not
sensible.
Homework Answers
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Consider the following two-stage game between an incumbent firm,
I, and a potential entrant, E. The...
Consider the following game: there are two players, an incumbent (denoted I) and a potential entrant...
Consider the following game: there are two players, an incumbent (denoted I) and a potential entrant (denoted E) to the market. The entrant has two actions: it can either enter the market in which the incumbent operates, or not enter. The incumbent has two actions: it can either fight the entrant, or accommodate. The payoffs are as follows: if E enters and I fights, E gets -1 and I gets 2. If E does not enter, I gets 10 for...
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price. The possible outcomes of these decisions are described in
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Will E believe the threat? Construct a game tree to help explain
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The table below shows a game played between two firms, Firm A and Firm B. In...
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QUESTION 15 Consider the following simultaneous-move game: Two firms, Firm 1 (raw player) and Firm 2...
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3. Find the Bayesian-Nash Equilibrium for the following Entry game." Two firms in same product market Incumbent chooses Build (B) or Don't Build (D) capacity Entrant chooses Enter E or Stay Out S Incumbent has two types, which affect cost of building capacity a = high cost type, and θι low cost type-o, has a higher capacity cost than θ Prior probability of 0h is p. Idea is incumbent earns a higher profit if entrant stays out. So may want...
An incumbent monopolist (M) faces a potential entrant (E). E has
to decide whether to enter or stay out. Following the action taken
by E, I has to decide whether to charge a low price or a high
price. The possible outcomes of these decisions are described in
the following payoff matrix.
a) Suppose M threatens to set a low price if E should enter.
Will E believe the threat? Construct a game tree to help explain
your answer. Then...
11. The table below shows a game played between two firms, Firm A and Firm B. In this game, each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B). Firm B Q=2 Q=3 Q=2 / (10, 10) (8, 12) Firm A Q=3 (12,8) L (6,6) a. What is the dominant strategy for each firm? Explain. b....
2. Suppos e there are two firms in an oligopoly, Firm A both firms charge a low price, each earns and Firm B. If $2 million in profit. If both firms charge a high price, each earns $3 million in profit. If one firm charges a high price and one charges a low price, customers flock to the firm with the low price, and that firm earns $4 million in profit while the firm with the high price earns $1...
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