Determine the sub game perfect equilibrium

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Reference no: EM131101775

Consider an industry with inverse demand: p (y) = 90 − y where y denotes industry output. There are two firms: firm 1 is the incumbent firm and firm 2 is the potential entrant. Firm 1 can adopt one of two technologies.

Technology A is labor intensive and is characterized by a cost function: CA (y) = 200 + 30y

Technology B is capital intensive, producing goods at zero marginal cost but at a very high fixed cost CB = 1600.

After firm 1 has chosen its technology, firm 2 can consider entering.

However, it has only one technology choice, the labor-intensive, technology A. If it enters, the two firms compete in quantities.

Questions:

b) Suppose firm 1 adopts technology A. Derive the best replies of the two firms in the post-entry game and show that firm 2 will enter.

c) Determine the subgame perfect equilibrium.

Reference no: EM131101775

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