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

question 6

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 perfect equilibrium strategies?

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

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