Suppose the market for a certain good is controlled by a single firm I (incumbent). Now, a second firm C (challenger) considers entering the market. In case of no entrance (ne), profits are TC = 0 and TI = 50 , respectively. In case of entry (e), firm I can either retaliate (r) which induces losses for both firms TC = TỊ = -10, or not retaliate (nr) which induces profits of TC = 10 and TI respectively. 20 (a) Depict this game in extensive form. (b) Find an equilibrium by backward induction. (c) Find all other equilibria (in pure and mixed strategies).

Suppose the market for a certain good is controlled by a single firm I (incumbent). Now, a second firm C (challenger) considers entering the market. In case of no entrance (ne), profits are TC = 0 and TI = 50 , respectively. In case of entry (e), firm I can either retaliate (r) which induces losses for both firms TC = TỊ = -10, or not retaliate (nr) which induces profits of TC = 10 and TI respectively. 20 (a) Depict this game in extensive form. (b) Find an equilibrium by backward induction. (c) Find all other equilibria (in pure and mixed strategies).

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

Chapter16: Bargaining

Section: Chapter Questions

Problem 16.1IP

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