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.