Suppose that an incumbent can commit to producing a large quantity of output before the potential entrant decides whether to enter. So, the incumbent Örst chooses whether to produce a small quantity or a large quantity. The rival then decides whether to enter. If the incumbent commits to the small output level and if the rival does not enter, the rival makes $0 and the incumbent makes $900. If it does enter, the rival makes $125 and the incumbent earns $450. If the incumbent commits to producing the large quantity, and the potential entrant stays out of the market, the potential entrant makes $0 and the incumbent makes $800. If the rival enters, the best the entrant can make is $0, the same amount it would earn if it didnít enter, but the incumbent earns only $400. Show the game tree. What is the SPNE?
Suppose that an incumbent can commit to producing a large quantity of output
before the potential entrant decides whether to enter. So, the incumbent Örst chooses
whether to produce a small quantity or a large quantity. The rival then decides whether to
enter. If the incumbent commits to the small output level and if the rival does not enter,
the rival makes $0 and the incumbent makes $900. If it does enter, the rival makes $125
and the incumbent earns $450. If the incumbent commits to producing the large quantity,
and the potential entrant stays out of the market, the potential entrant makes $0 and the
incumbent makes $800. If the rival enters, the best the entrant can make is $0, the same
amount it would earn if it didnít enter, but the incumbent earns only $400. Show the game
tree. What is the SPNE?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
