Business, 12.03.2021 18:20, landofliam30
g 3. An incumbent monopoly is facing a potential rival firm that is considering entering the market. The incumbent can commit to producing a large quantity of output before the potential entrant decides whether to enter. The incumbent decides firstly whether to commit to producing a small quantity or a large quantity. The rival firm then decides whether to enter the market and compete or not. If the incumbent commits to producing a small quantity and if the rival does not enter, the rival makes £0 and the incumbent makes £900,000. If the rival firm does enter in this case, the rival makes £125,000 and the incumbent earns £450,000. If instead the incumbent commits to producing the larger quantity, and the potential rival does not enter, the potential entrant makes £0 and the incumbent makes £800,000. If the rival does enter in this case, the entrant will make a loss (a negative profit), but the incumbent earns only £400,000. Illustrate this game in extensive form. What is the subgame perfect Nash equilibrium?
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