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Nash equilibrium

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You are considering entering a market serviced by a monopolist. You currently earn $0 economic profits, while the monopolist earns $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.

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Solution Summary

Apply the Nash equilibrium.

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