284 PART FOUR Microeconomics of Product Markets FIGURE 14.7 Extensive form representation of first-mover advantage and the preemption of entry. Here we display the game shown in Figure 14.6 in extensive form (game-tree format) rather Big box (BB) Huge box (HB) Profits moves first moves second (BB, HB) than in strategic form (payoff-matrix format). The extensive form A (-5, -5) allows us to study the sequence in which decisions are made, moving from left to right. Big Box (BB) moves first at decision node BB. Its decision about Build or Don't Build will lead, respectively, to either decision node HB, or HB,. Huge Box moves second from either HB, or HB, (depending upon what Big Box did at decision node BB). Huge Box's decision at HB, or HB, will lead to one of the four terminal nodes: A. C, B, and D (which correspond to the Build Build HB 2' Don't Build C (12, 0) BB identically labeled cells in Figure 14.6). The bold line segments indicate the subgame perfect Nash equilibrium path that shows how the game will be played out if each company always does what is most profitable for itself given what it knows about the profit incentives facing its rival. Build B (0, 12) Don't Build HB2 Don't Build D (0, 0)

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Look back at Figure. Suppose that the payouts at terminal node B change to (13,12) while everything else in the game stays the same. The new subgame perfect Nash equilibrium will consist of the two line segments:

a. Build at BB followed by Build at HB1.

b. Build at BB followed by Don’t Build at HB1.

c. Don’t Build at BB followed by Build at HB2.

d. Don’t Build at BB followed by Don’t Build at HB2.

284 PART FOUR Microeconomics of Product Markets
FIGURE 14.7 Extensive form representation of first-mover
advantage and the preemption of entry. Here we display the game
shown in Figure 14.6 in extensive form (game-tree format) rather
Big box (BB)
Huge box (HB)
Profits
moves first
moves second
(BB, HB)
than in strategic form (payoff-matrix format). The extensive form
A (-5, -5) allows us to study the sequence in which decisions are made,
moving from left to right. Big Box (BB) moves first at decision node
BB. Its decision about Build or Don't Build will lead, respectively, to
either decision node HB, or HB,. Huge Box moves second from
either HB, or HB, (depending upon what Big Box did at decision
node BB). Huge Box's decision at HB, or HB, will lead to one of
the four terminal nodes: A. C, B, and D (which correspond to the
Build
Build
HB
2'
Don't Build
C (12, 0)
BB
identically labeled cells in Figure 14.6). The bold line segments
indicate the subgame perfect Nash equilibrium path that shows
how the game will be played out if each company always does what
is most profitable for itself given what it knows about the profit
incentives facing its rival.
Build
B (0, 12)
Don't Build
HB2
Don't Build
D (0, 0)
Transcribed Image Text:284 PART FOUR Microeconomics of Product Markets FIGURE 14.7 Extensive form representation of first-mover advantage and the preemption of entry. Here we display the game shown in Figure 14.6 in extensive form (game-tree format) rather Big box (BB) Huge box (HB) Profits moves first moves second (BB, HB) than in strategic form (payoff-matrix format). The extensive form A (-5, -5) allows us to study the sequence in which decisions are made, moving from left to right. Big Box (BB) moves first at decision node BB. Its decision about Build or Don't Build will lead, respectively, to either decision node HB, or HB,. Huge Box moves second from either HB, or HB, (depending upon what Big Box did at decision node BB). Huge Box's decision at HB, or HB, will lead to one of the four terminal nodes: A. C, B, and D (which correspond to the Build Build HB 2' Don't Build C (12, 0) BB identically labeled cells in Figure 14.6). The bold line segments indicate the subgame perfect Nash equilibrium path that shows how the game will be played out if each company always does what is most profitable for itself given what it knows about the profit incentives facing its rival. Build B (0, 12) Don't Build HB2 Don't Build D (0, 0)
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