Reference no: EM133082444

Answer both parts of the question

The game tree below shows a game between a potential market entrant and an incumbent monopolist (M) in which the entrant moves first (the payoffs are written at the terminal nodes of the game and are in millions of the local currency).

i) Referring to the game tree, explain why the monopolist's threat to fight entry is not credible. Discuss how the monopolist could make the threat to fight entry credible by investing in a costly commitment to fighting entry. Explain the conditions that would need to be satisfied in order that such a commitment by the monopolist would be made. Illustrate your answer using a numerical example.

ii) Referring to the game tree and your answer to part (i) of the question, explain how uncertainty about the monopolist's payoffs could deter entry. In your analysis refer to the probability, P, that the monopolist is strong and will fight entry and derive the critical value of P that deters entry.