Gino's is the only pizza restaurant in a commercial district. It makes $400 a day in revenue. Another pizzeria, Vito's, is considering entering the market. When facing the potential entry of Vito's pizzeria, Gino has two choices: to fight Vito's by selling pizza below its cost in the hope of preventing Vito's entry, or to accommodate Vito's. In the first case, Vito's would make $200 and Gino's -- $100. In the second case, Vito's would make $300 and Gino's -- $200. The normal form of the game is presented below.
Gino's is the only pizza restaurant in a commercial district. It makes $400 a day in revenue. Another pizzeria, Vito's, is considering entering the market. When facing the potential entry of Vito's pizzeria, Gino has two choices: to fight Vito's by selling pizza below its cost in the hope of preventing Vito's entry, or to accommodate Vito's. In the first case, Vito's would make $200 and Gino's -- $100. In the second case, Vito's would make $300 and Gino's -- $200. The normal form of the game is presented below.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Gino's is the only pizza restaurant in a commercial district. It makes $400 a day in revenue.
Another pizzeria, Vito's, is considering entering the market. When facing the potential entry
of Vito's pizzeria, Gino has two choices: to fight Vito's by selling pizza below its cost in the
hope of preventing Vito's entry, or to accommodate Vito's. In the first case, Vito's would
make $200 and Gino's -- $100. In the second case, Vito's would make $300 and Gino's --
$200. The normal form of the game is presented below.
Gino's
(Incumbent)
Accommodate
Fight
Vito's (Potential Entrant)
Enter
200, 300
100, 200
Don't Enter
400, 0
400, 0
a. Suppose both firms decide simultaneously and independently of each other. Find all
Nash equilibria of this game.
b. Now, suppose that Vito's first decides whether to enter or not, and then Gino's
makes its choice after observing Vito's decision. Present the game in an extensive
form and find all Subgame Perfect Nash Equilibria (SPNE) of this sequential game.
c. Will Vito enter the market? Is Gino's threat credible?
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