(Market Entry Deterrence): NSG is considering entry into the local phone market in the Bay Area. The incumbent S&P, predicts that a price war will result if NSG enters. If NSG stays out, S&P earns monopoly profits valued at $10 million (net present value, or NPV of profits), while NSG earns zero. If NSG enters, it must incur irreversible entry costs of $2 million. If there is a price war, each firm earns $1 million (NPV). S&P always has the option of accommodating entry (i.e., not starting a price war). In such a case, both firms earn $4 million (NPV). Suppose that the timing is such that NSG first has to choose whether or not to enter the market. Then S&P decides whether to “accommodate entry” or “engage in a price war.” a. Model this as a dynamic game and draw the game tree. b. What is the subgame perfect Nash equilibrium outcome to this sequential game?
(Market Entry Deterrence): NSG is considering entry into the local phone market in
the Bay Area. The incumbent S&P, predicts that a price war will result if NSG enters. If NSG stays
out, S&P earns
while NSG earns zero. If NSG enters, it must incur irreversible entry costs of $2 million. If there is
a price war, each firm earns $1 million (NPV). S&P always has the option of accommodating
entry (i.e., not starting a price war). In such a case, both firms earn $4 million (NPV). Suppose
that the timing is such that NSG first has to choose whether or not to enter the market. Then
S&P decides whether to “accommodate entry” or “engage in a price war.”
a. Model this as a dynamic game and draw the game tree.
b. What is the subgame perfect Nash equilibrium outcome to this sequential game?
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