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What is the subgame perfect equilibrium outcome

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Problem 1. lncor is currently the only supplier of widgets and earns monopoly rents of $700k. Enterprise is considering entering the market. It would cost Enterprise $100k to set up a factory. However, lncor has threatened to start a price war if Enterprise enters. Your research shows that if lncor follows though on its threat, lncor would earn only $100k from producing widgets, while Enterprise would earn only $25k (before accounting for building costs). However, if lncor does not start the price war, it would make $300k, while Enterprise would earn $200k.

1. Draw this game in extensive form. Be sure to fully label the game tree.

2. What is the subgame perfect equilibrium outcome?

3. Would you advise Enterprise to build the widget factory?

Reference no: EM133082283

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