Consider a game where a potential market Entrant is trying to decide whether or not to enter the market. An Incumbent monopolist is established and can choose to cut the price, maintain the price, or raise the price in hopes of deterring the Entrant from entering. Incumbent Entrant Enter Stay Out Cut Price -4,4 0,9 Maintain Price 4,6 0,12 Raise Price 5,5 0, 13 a) Suppose the Entrant and the Incumbent make their decisions simultaneously. Is there a pure strategy Nash equilibrium? If so, what is it? b) Suppose the players move sequentially, and that the Entrant moves first. Set up the game tree and solve for the equilibrium path. Can the Incumbent deter entry? Explain. c) Now suppose that the Incumbent moves first. Again, set up the game tree. What is the subgame perfect Nash equilibrium outcome now? Can the Incumbent deter entry now?

Consider a game where a potential market Entrant is trying to decide whether or not to enter the market. An Incumbent monopolist is established and can choose to cut the price, maintain the price, or raise the price in hopes of deterring the Entrant from entering. Incumbent Entrant Enter Stay Out Cut Price -4,4 0,9 Maintain Price 4,6 0,12 Raise Price 5,5 0, 13 a) Suppose the Entrant and the Incumbent make their decisions simultaneously. Is there a pure strategy Nash equilibrium? If so, what is it? b) Suppose the players move sequentially, and that the Entrant moves first. Set up the game tree and solve for the equilibrium path. Can the Incumbent deter entry? Explain. c) Now suppose that the Incumbent moves first. Again, set up the game tree. What is the subgame perfect Nash equilibrium outcome now? Can the Incumbent deter entry now?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider a game where a potential market Entrant is trying to decide whether or not to enter the
market. An Incumbent monopolist is established and can choose to cut the price, maintain the
price, or raise the price in hopes of deterring the Entrant from entering.
Incumbent
Entrant
Enter
Stay Out
Cut Price
-4,4
0,9
Maintain
Price
4,6
0,12
Raise
Price
5,5
0, 13
a) Suppose the Entrant and the Incumbent make their decisions simultaneously. Is there a pure
strategy Nash equilibrium? If so, what is it?
b) Suppose the players move sequentially, and that the Entrant moves first. Set up the game tree
and solve for the equilibrium path. Can the Incumbent deter entry? Explain.
c) Now suppose that the Incumbent moves first. Again, set up the game tree. What is the subgame
perfect Nash equilibrium outcome now? Can the Incumbent deter entry now?

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