Homework Help is Here – Start Your Trial Now!
Business
Economics
1. Consider a two period game where an incumbent monopolist in an industry fears entry in the second period. The demand for the product is given by P = 100- Q, where Q is the total quantity produced in the market. Suppose the incumbent has a marginal cost of $24, while the entrant has a marginal cost of $38. In addition, each firm incurs a fixed cost of $200 in each period that it is in business. The incumbent monopolist can either charge a monopoly price in period 1 or a limit price. In period 2 the incumbent monopolist can again charge either a limit price or an accommodating price. The potential entrant firm has two strategies: either to enter or stay out at the beginning of period 2 after observing the price charged by the incumbent in period 1. a) Construct the extensive form of the game described above. b) Compute the payoffs at each terminal node making the same assumption about the limit price as was made in class. The first number at each terminal node should be the total profit of the incumbent computed over the two periods. The second number should be the profit of the entrant. c) Find out the subgame perfect Nash equilibrium of this game. Write down the strategy of each player carefully that gives rise to the SPNE keeping in mind that a strategy must specify an action at each node that a player may be called upon to play. Why doesn't an incumbent want to charge a limit price in this game? d) In reality we do see firms charging a limit price or a predatory price. What can account for this behavior despite the opposite prediction of the above model?

1. Consider a two period game where an incumbent monopolist in an industry fears entry in the second period. The demand for the product is given by P = 100- Q, where Q is the total quantity produced in the market. Suppose the incumbent has a marginal cost of $24, while the entrant has a marginal cost of $38. In addition, each firm incurs a fixed cost of $200 in each period that it is in business. The incumbent monopolist can either charge a monopoly price in period 1 or a limit price. In period 2 the incumbent monopolist can again charge either a limit price or an accommodating price. The potential entrant firm has two strategies: either to enter or stay out at the beginning of period 2 after observing the price charged by the incumbent in period 1. a) Construct the extensive form of the game described above. b) Compute the payoffs at each terminal node making the same assumption about the limit price as was made in class. The first number at each terminal node should be the total profit of the incumbent computed over the two periods. The second number should be the profit of the entrant. c) Find out the subgame perfect Nash equilibrium of this game. Write down the strategy of each player carefully that gives rise to the SPNE keeping in mind that a strategy must specify an action at each node that a player may be called upon to play. Why doesn't an incumbent want to charge a limit price in this game? d) In reality we do see firms charging a limit price or a predatory price. What can account for this behavior despite the opposite prediction of the above model?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
See similar textbooks
icon
Related questions
Question

help please answer in text form with proper workings and explanation for each and every part and steps with concept and introduction no AI no copy paste remember answer must be in proper format with all working

1. Consider a two period game where an incumbent monopolist in an industry fears entry in the second period. The demand for the product is given by P = 100- Q, where Q is the total quantity produced in the market. Suppose the incumbent has a marginal cost of $24, while the entrant has a marginal cost of $38. In addition, each firm incurs a fixed cost of $200 in each period that it is in business. The incumbent monopolist can either charge a monopoly price in period 1 or a limit price. In period 2 the incumbent monopolist can again charge either a limit price or an accommodating price. The potential entrant firm has two strategies: either to enter or stay out at the beginning of period 2 after observing the price charged by the incumbent in period 1. a) Construct the extensive form of the game described above. b) Compute the payoffs at each terminal node making the same assumption about the limit price as was made in class. The first number at each terminal node should be the total profit of the incumbent computed over the two periods. The second number should be the profit of the entrant. c) Find out the subgame perfect Nash equilibrium of this game. Write down the strategy of each player carefully that gives rise to the SPNE keeping in mind that a strategy must specify an action at each node that a player may be called upon to play. Why doesn't an incumbent want to charge a limit price in this game? d) In reality we do see firms charging a limit price or a predatory price. What can account for this behavior despite the opposite prediction of the above model?
Transcribed Image Text:1. Consider a two period game where an incumbent monopolist in an industry fears entry in the second period. The demand for the product is given by P = 100- Q, where Q is the total quantity produced in the market. Suppose the incumbent has a marginal cost of $24, while the entrant has a marginal cost of $38. In addition, each firm incurs a fixed cost of $200 in each period that it is in business. The incumbent monopolist can either charge a monopoly price in period 1 or a limit price. In period 2 the incumbent monopolist can again charge either a limit price or an accommodating price. The potential entrant firm has two strategies: either to enter or stay out at the beginning of period 2 after observing the price charged by the incumbent in period 1. a) Construct the extensive form of the game described above. b) Compute the payoffs at each terminal node making the same assumption about the limit price as was made in class. The first number at each terminal node should be the total profit of the incumbent computed over the two periods. The second number should be the profit of the entrant. c) Find out the subgame perfect Nash equilibrium of this game. Write down the strategy of each player carefully that gives rise to the SPNE keeping in mind that a strategy must specify an action at each node that a player may be called upon to play. Why doesn't an incumbent want to charge a limit price in this game? d) In reality we do see firms charging a limit price or a predatory price. What can account for this behavior despite the opposite prediction of the above model?
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS