Question

We considered a sequential move game in which an entrant was considering entering an industry in completion with an incumbent firm, Consider now that the entrant, if fought, has the possibility of withdrawing from the industry (at a loss of 1 for the entrant and a gain of 8 for the incumbent), What is the equilibrium of the game? Discuss if the entrant is better off with or without the ability to withdraw.

Answer 1

Answer:-

At the node fight, an entrant will choose to withdraw (as his loss is lower in this case).
Knowing this, at the node ‘In’, a monopolist will choose to fight (as choosing fight will earn
him a payoff of 8).

Knowing this trail, entrant at the starting node, will not enter the market i.e. will stay out
of the market. This would allow him to make zero profit as against the loss of -$1 if he chooses
to enter.

So in this equilibrium, an entrant will not enter the market. And hence the equilibrium
the outcome would be (0, 10).