Firm B Enter Don\'t Enter Low Price (3,21) (3,1) Firm A High Price (4,5) (6,3) Q
ID: 1186609 • Letter: F
Question
Firm B
Enter Don't Enter
Low Price (3,21) (3,1)
Firm A High Price (4,5) (6,3)
QUestion: Show how the payoff matrix in the table for Problem 10 might change if firm A were to make a credible threat to lower the price by building excess capacity to deter frim B from entering the market. (Question 10 asked: Given the following payoff matrix, (a) indicate the best strategy for each firm. (b) Why is the entry-deterrent threat by firm A to lower the price not credible to firm B? (c) What could firm A do to make its threat credible without building excess capacity?
Explanation / Answer
a) Best strategy will be the 2nd block and the third block that is low price by firm A and firm B does not enter as well as the state where high price by firm A and Firm B enters. Both indicate the best strategy for the firms
b) Because the firm by lowering the capacity but not increasing the capacity will not deter B from entering
c) A can make their threat credible by decreasing the prices but to cover the losses, decrease the cost of production as well.
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