Reference no: EM132422615

Problem: Game Theory: Consider a market with a single incumbent firm (i.e. existing firm). A second firm is considering whether or not to enter this market. Firm 1 (the incumbent) chooses to produce using either a new plant (action N) or using an old plant (action O). Firm 2 chooses either enter (action E) or don't enter (action D).

Payoffs from the different outcomes are as follows:

• If the incumbent uses a new plant and the entrant enters the market, then π1 = $4000 and π2 = $2000.
• If the incumbent uses a new plant and the entrant does not enter the market, then π1 = $5000 and π2 = $0.
• If the incumbent uses a old plant and the entrant enters the market, then π1 = $4500 and π2 = $1500.
• If the incumbent uses a old plant and the entrant does not enter the market, then π1 = $6000 and π2 = $0.

(a) Write down the strategy sets for each firm.

(b) Write the payoff matrix for this game.

(c) Write the best-response functions for each firm.

(d) Does either firm have a dominant strategy?

(e) Is there a Nash Equilibrium? If so, how many?