Reference no: EM133081628

A market is characterized by a demand function Q = 1 - P and by a single ?rm that has no production costs. The monopolist is facing potential entry from a new ?rm having no production costs either, but who does need to pay an entry cost E = 1,320 = [105 in case it decides to enter. If the incumbent accepts the entry passively, then Stackelberg competition is played with the incumbent choosing its quantity ?rst. However, the monopolist can threaten to produce the competitive output [i.e., the quantity such that P = {I} so that the new entrant will make losses if it enters the market. If the new ?rm does not enter, the incumbent behaves as a monopolist.

• Compute the payoffs of both ?rms (i.e., pro?ts) in the case of Monopoly, Stackelberg Duopoly, and aggressive behavior by the incumbent after entry.
• Using the extensive form, illustrate this entry game as a threestage game.
• Is the threat of competitive behavior after entry by the monopolist credible? Answer the question by ?nding the subgame perfect equilibrium of the game.
• Describe the dynamic game using the normal form {paysoE matrix} representation and ?nd the Nash equilibria of the game. Does the game have any Nash equilibria that are not subgame perfect?