Question

Consider the following market game: An incumbent firm, called firm 3, is already in an industry.

Two potential entrants, called firms 1 and 2, can each enter the industry by paying the entry cost of 2. First, firm 1 decides whether to enter or not. Then, after observing firm 1's choice, firm 2 decides whether to enter or not. Every firm, including firm 3, observes the choices of firms 1 and 2.

After this, all of the firms in the industry (including firm 3) compete in a Cournot oligopoly, where they simultaneously and independently select quantities. The price is determined by the inverse demand curve p = 12-Q, where Q is the total quantity produced in the industry. Firm 3's total cost is  c₃(q₃) = q₃. The total cost of the entering firm i is given by c_i(q_i) = 6.3q_i where i can be 1 or 2. (Remember that firms 1 and 2 have to pay the fixed cost of 2 to enter and that neither firm 1 or firm 2 might enter.)

What is the total quantity produced in the market?

Expert Answer

Answer 1