Suppose we’ve modelled a firm’s entry decision with a one-shot, simultaneous move game, determined payoffs and found the Nash equilibrium. Suppose with the payoffs we came up with, both firms have a clear dominant strategy such that there is a Nash equilibrium in which both firms play their dominant strategy. However, when we observe the actual actions of the firms, we see that they don’t choose the strategy we predicted and the outcome of the game doesn’t match the Nash equilibrium. Why might this be? Give at least 4 reasons. (Hint: The firms are rational.)

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