Question

2. Entry Deterrence. Suppose there is one incumbent monopolist and one potential entrant in a

given market. If the potential entrant stays out, then the monopolist will receive monopoly

profits of 100, while the potential entrant will receive profits of 10 from other endeavors. On the

other hand, if the potential entrant enters, then the incumbent can ACCOMODATE, or

RETALIATE. If he accommodates, then the incumbent and entrant each receive profits of 40.

But if the incumbent retaliates, then each receive 0 profits.

(a) Draw the game tree.

(b) Solve for the players’ strategies using backward induction.

(c) Find a different Nash equilibrium, and comment on the reasonableness of this

alternative solution.

Answer #1

In the given question player one is incumbent and player two is entrant so payoff of incumbent is written first then payoff of player two .i.e. entrant

from the above picture the subgame nash equilibrium is (Accomodate, Enter)

c) A different equilibrium can be that the incumbent retaliates and the entrant stays out so that Incumbent continues to get monopolist profits which will be a case if player one gets first leader advantage and he is able to bear the losses of retaliating to gain monopoly profits later.

Consider the following market entry game. There are two firms :
firm 1 is an incumbent monopolist on a given market. Firm 2 wishes
to enter the market. In the first stage, firm 2 decides whether or
not to enter the market. If firm 2 stays out of the market, firm 1
enjoys a monopoly profit of 2 and firm 2 earns 0 profit. If firm 2
decides to enter the market, then firm 1 has two strtegies : either...

QUESTION 1
If a monopolist only charges one price, then we can conclude
that:
A. Consumer surplus is the same as under perfect competition
B. Consumer surplus is lower than under perfect competition
C. Consumer surplus is same under any market structure
D. Consumer surplus is higher than under perfect competition
QUESTION 2
Suppose you are considering buying the only major league
baseball team in a major US city. Currently, the team prices all
seats at a single monopoly price...

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