Consider an industry with inverse demand given by p = 12 – Q. There are two firms: the incumbent (I) and a potential entrant (E). The incumbent moves first by choosing a level of quantity q1 from the interval (0, 4]. The entrant observes qi and decides whether or not to enter and how much to produce if it enters (qe). There is no fixed cost of entry. If the entrant decides to stay out, its profit is zero and the incumbent enjoys a monopoly position. Suppose that both the incumbent and the entrant have identical marginal costs equal to c= 8. (a) Derive the subgame perfect equilibrium of this two-stage game. What are the quantities produced by the incumbent and the entrant? What are their profits?

Consider an industry with inverse demand given by p = 12 – Q. There are two firms: the incumbent (I) and a potential entrant (E). The incumbent moves first by choosing a level of quantity q1 from the interval (0, 4]. The entrant observes qi and decides whether or not to enter and how much to produce if it enters (qe). There is no fixed cost of entry. If the entrant decides to stay out, its profit is zero and the incumbent enjoys a monopoly position. Suppose that both the incumbent and the entrant have identical marginal costs equal to c= 8. (a) Derive the subgame perfect equilibrium of this two-stage game. What are the quantities produced by the incumbent and the entrant? What are their profits?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 10MC: You are considering entry into a market in which there is currently only one producer (incumbent)....

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