An incumbent can commit to producing a large quantity of output before the poten

Question

An incumbent can commit to producing a large quantity of output before the potential rival decides whether to enter. The incumbent chooses whether to commit to produce a small quantity or a large quantity. The rival then decides whether to enter Enter (1,350,375) The payoffs are represented in the game tree illustrated in the figure to the right. What is the subgame perfect Nash equilibrium? Rival Small ( A. The Nash equilibrium is for the incumbent to produce the large quantity (2,700,0) Don't enter and for the rival to enter regardless of the incumbent's quantity for the rival to only enter if the incumbent produces the small quantity and for the rival to not enter regardless of the incumbent's quantity Incumben B. The Nash equilibrium is for the incumbent produce the large quantity and Enter (1,200, -60) ° C. The Nash equilibrium is for the incumbent to produce the large quantity Large D. E. The Nash equilibrium is for the incumbent produce the small quantity and The game does not have a Nash equilibrium. (2,400,0) Don't enter for the rival to only enter if the incumbent produces the small quantity.

Explanation / Answer

Option B is correct.

The nash Equilibrium is for the incumbent produce the large quantity and for the rival to only enter if the incumbent produces the small quantity. This is because rival will choose to enter if the incumbent produces the small quantity and get higher payoff (375> 0). Similarly rival will choose to do not enter if incumbent produces large quantity and he gets higher payoff ( 0> -60). But in these two outcomes incumbent will get higher payoff when he will choose larger quantity ( 2400> 1350). Hence nash equilibrium is ( large, do not enter)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.