Consider the following entry-deterrence game. A potential entrant has two strategies, “Enter” or “Stay Out”. An incumbent firm can either Price Low or Price High, depending on whether they want to try to fight or accommodate the entrant. (The Price Low option could be a limit price, for example). Suppose if the entrant Enters and the incumbent Prices Low, both firms lose $-1M. If the entrant enters and the incumbent Prices High, each firm earns $2M. If the Entrant doesn’t enter, the incumbent earns $4M and the entrant earns $0. a)Using the concept of Nash Equilibrium, what are the predicted strategies and profits? Set up a game box or tree and explain your reasoning. b) Give an example of a different profit outcome that would lead to a different Nash Equilibrium. (From this, you can see that sometimes deterrence is effective and sometimes it isn’t, depending on the profits).

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