Consider the Following Entry Game: Here,firm B Is an Existing

question 36

Multiple Choice

Consider the following entry game: Here,firm B is an existing firm in the market,and firm A is a potential entrant.Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter") .If firm A decides to enter the market,firm B must decide whether to engage in a price war (play "hard") ,or not (play "soft") .By playing "hard," firm B ensures that firm A makes a loss of $1 million,but firm B only makes $1 million in profits.On the other hand,if firm B plays "soft,",the new entrant takes half of the market,and each firm earns profits of $5 million.If firm A stays out,it earns zero while firm B earns $10 million.Which of the following are Nash equilibrium strategies?

• A) (enter, hard) and (not enter, hard)
• B) (enter, soft) and (not enter, soft)
• C) (not enter, hard) and (enter, soft)
• D) (enter, hard) and (not enter, soft)

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Definitions:

Excise Tax

A tax levied on specific goods or services, such as tobacco or gasoline, typically imposed at the manufacturing or retail level.

Consumer Surplus

The separation between the theoretical price consumers are willing to pay for a good or service and the practical price they pay.

Point Price Elasticity

A measure of how the quantity demanded of a good responds to a change in the price of that good, calculated at a specific point on the demand curve.

Quarterly Demand

The total quantity of a good or service that consumers are willing and able to purchase at a given price over the span of three months.