You Are Considering Entering a Market Serviced by a Monopolist

question 45

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

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Definitions:

Foreign Assets

Investments or properties owned by individuals, companies, or governments in countries other than their own.

Trade Balance

The difference in value between a country's imports and exports over a certain period, indicating the relative strength of its economy.

Net Capital Outflow

The sum representing a country's outbound investments minus its inbound investments from abroad over a specific period.

Investment

The allocation of resources, such as capital or time, in expectation of future benefit or profit.