Firm A currently monopolizes its market and earns profits of $10M. Firm B is a potential entrant that is thinking about entering the market. If B does not enter the market, it earns profits of $0, while A continues to earn profits of $10M. If B enters, then A must choose between accommodating entry and fighting it. If A accommodates, the A earns $5M and B earns $5M. If A fights, both lose $5M. EXTEND the above game. Now, suppose the decision of B to enter is reversible in the following way. After B enters the market, and A has decided to either fight or accommodate, B can choose to remain in the market or exit. All payoffs from the above game remain the same. However, if B decides to exit the market, then B suffers a loss of $1 M, while A regains the old profit of $10M. Draw the game in extensive form and predict the outcome.
Firm A currently monopolizes its market and earns profits of $10M. Firm B is a potential entrant that is thinking about entering the market. If B does not enter the market, it earns profits of $0, while A continues to earn profits of $10M. If B enters, then A must choose between accommodating entry and fighting it. If A accommodates, the A earns $5M and B earns $5M. If A fights, both lose $5M. EXTEND the above game. Now, suppose the decision of B to enter is reversible in the following way. After B enters the market, and A has decided to either fight or accommodate, B can choose to remain in the market or exit. All payoffs from the above game remain the same. However, if B decides to exit the market, then B suffers a loss of $1 M, while A regains the old profit of $10M. Draw the game in extensive form and predict the outcome.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Firm A currently monopolizes its market and earns profits of $10M. Firm B is a potential entrant that is thinking about entering the market. If B does not enter the market, it earns profits of $0, while A continues to earn profits of $10M. If B enters, then A must choose between accommodating entry and fighting it. If A accommodates, the A earns $5M and B earns $5M. If A fights, both lose $5M.
EXTEND the above game. Now, suppose the decision of B to enter is reversible in the following way. After B enters the market, and A has decided to either fight or accommodate, B can choose to remain in the market or exit. All payoffs from the above game remain the same. However, if B decides to exit the market, then B suffers a loss of $1 M, while A regains the old profit of $10M. Draw the game in extensive form and predict the outcome.
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