consider a market with inverse demand P(Q) = 10 − Q and two firms with cost curves C1(q1) = 2q1 and C2(q2) = 2q2 (that is, they have the same marginal costs and no fixed costs). They compete by choosing quantities. Now consider a modified game, which goes as follows: First, Firm 1 decides whether to enter the market or not. As in the previous question, there is no fixed cost, even if the firm decides to enter. Next, Firm 2 observes Firm 1’s entry choice and decides whether to enter or not.Firm 2 has no fixed cost as well. If no firm enters, the game ends. If only one firm enters, that firm chooses quantity, operating as a monopolist. If both firms enter, then Firm 1 chooses quantity q1. Then, Firm 2 observes Firm 1’s choice of q1 and then chooses q2 (like in the previous question). If a firm does not enter, it gets a payoff of zero. Which of the following statements is consistent with the SPNE of this game? Hint: you don’t need complicated math to solve this problem.(a) Neither firm enters the market.(b) Only Firm 1 enters.(c) Only Firm 2 enters.(d) Both firms enter.(e) (Not used in this question)
consider a market with inverse
Now consider a modified game, which goes as follows:
First, Firm 1 decides whether to enter the market or not. As in the previous question, there is no fixed cost, even if the firm decides to enter.
Next, Firm 2 observes Firm 1’s entry choice and decides whether to enter or not.
Firm 2 has no fixed cost as well.
If no firm enters, the game ends.
If only one firm enters, that firm chooses quantity, operating as a monopolist.
If both firms enter, then Firm 1 chooses quantity q1. Then, Firm 2 observes Firm 1’s choice of q1 and then chooses q2 (like in the previous question).
If a firm does not enter, it gets a payoff of zero. Which of the following statements is consistent with the SPNE of this game? Hint: you don’t need complicated math to solve this problem.
(a) Neither firm enters the market.
(b) Only Firm 1 enters.
(c) Only Firm 2 enters.
(d) Both firms enter.
(e) (Not used in this question)
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