Explain subgame perfect equilibrium

Reference no: EM1372917

Suppose you are planning entering a market serviced through a monopolist. You currently receive $0 economic profits, while monopolist receives $5. If you enter the market and the monopolist engages in a price war, you will lose $5 and the monopolist will earn $1. If the monopolist doesn't engage in a price war, you will each earn profits of $2.

a. Write out the extensive form of the above game.
b. There are two Nash equilibria for the game. What are they?
c. Is there a subgame perfect equilibrium? Explain.
d. If you were the potential entrant, would you enter? Explain why or why not.

Reference no: EM1372917

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