Before entry, the incumbent earns a monopoly profit of $10 (profits in millions)

Question

Before entry, the incumbent earns a monopoly profit of $10 (profits in millions). If entry occurs, the incumbent and rival each earn the duopoly profit, 3. Suppose that the incumbent can induce the government to require all firms to install pollution-control devices that cost each firm $4. Should the incumbent urge the government to require pollution-control devices? Why or why not? Assume for simplicity the game tree is illustrated in the figure to the right. All profits are in millions. What is the subgame perfect Nash equilibrium? Rival No device The Nash equilibrium is for the incumbent to require devices and for the rival to not enter regardless of whether devices are required 0 A. Don't enter ncumbern O B. The game does not have a Nash equilibrium. ° C. The Nash equilibrium is for the incumbent to not require devices and for the rival to only enter if devices Enter are not required Devices Rival ( The Nash equilibrium is for the incumbent to require devices and for the rival to enter regardless of whether devices are required The Nash equilibrium is for the incumbent to require devices and for the rival to only enter if devices are not required D. (6,0) Don't enter O E.

Explanation / Answer

the incumbent should not urge the government because if they use the device with entry then they should have to face negative profit (-1,-1) and in another case, when rival doesn't enter for the duopoly.

C. The Nash Equilibrium is for the incumbent to not require device and for the rival to the only enter if the device is not required. because both firms getting benefits (3,3).

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