Question 1: The following is the game of fighting entry. A new firm, referred to as the entrant, has to decide whether to enter the market or not. An established firm, referred to as firm 1, has then to decide given the actions of the new firm whether to lower the price (and hence fight the entrant) or keep its price high. The payoffs to each are shown below Entrant Enter Do not Enter a. Represent the game in extensive form. b. High price 60, 60 0, 100 Firm 1 Low price 0,0 0,0 Find the subgame perfect Nash equilibrium c. What can you say about the potential for firm 1 to fight the entrant? Firm 1 threatens to lower price if the entrant enters. What do you think of this threat?

Question 1: The following is the game of fighting entry. A new firm, referred to as the entrant, has to decide whether to enter the market or not. An established firm, referred to as firm 1, has then to decide given the actions of the new firm whether to lower the price (and hence fight the entrant) or keep its price high. The payoffs to each are shown below Entrant Enter Do not Enter a. Represent the game in extensive form. b. High price 60, 60 0, 100 Firm 1 Low price 0,0 0,0 Find the subgame perfect Nash equilibrium c. What can you say about the potential for firm 1 to fight the entrant? Firm 1 threatens to lower price if the entrant enters. What do you think of this threat?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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