You Are Considering Entering a Market Serviced by a Monopolist

question 21

Essay

You are considering entering a market serviced by a monopolist.You currently earn $0 economic profits,while the monopolist earns $5.If you enter the market and the monopolist engages in a price war,you will lose $5 and the monopolist will earn $1.If the monopolist doesn't engage in a price war,you will each earn profits of $2.
a.Write out the extensive form of the above game.
b.There are two Nash equilibria for the game.What are they?
c.Is there a subgame perfect equilibrium?

d.If you were the potential entrant,would you enter?
Explain why or why not.

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Definitions:

Piece Rates

A pay system where employees are compensated based on the quantity of work they produce, usually at a fixed rate per unit produced.

Commissions

A form of payment to an employee based on completing a task or making a sale, often a percentage of the sale amount.

Merit Pay

Pay increase given to employees based on their job performance, as a reward for their contributions towards organizational goals.

Indirect Pay

Compensation that includes benefits not given directly as cash, such as health insurance, retirement plans, and paid time off.