Refer to the Normal-Form Game of Price Competition Shown Below

question 125

Multiple Choice

Refer to the normal-form game of price competition shown below. Firm B is the incumbent facing potential entry from its rival, firm A. Firm A's strategies consist of {entry, stay out}. Firm B's strategies are then {hard if entry; hard if stay out; soft if entry; soft if stay out}. Find the subgame Nash equilibrium to this game, if one exists.

• A) Firm A plays {stay out}; firm B plays {hard if entry}.
• B) Firm A plays {entry}; firm B plays {hard if entry}.
• C) Firm A plays {entry}; firm B plays {soft if entry}.
• D) There is no subgame Nash equilibrium to this game.

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Definitions:

Double Declining-balance

An accelerated method of depreciation where an asset's book value is reduced at double the rate of its straight-line depreciation.

Accelerated Depreciation

A method of depreciation used for accounting or income tax purposes that allows higher deductions in the earlier years of the useful life of an asset.

Depreciation Expense

The systematic allocation of the cost of a tangible asset over its useful life, reflecting the asset's consumption, wear and tear, or obsolescence.

Residual Value

The estimated value of an asset at the end of its useful life, important in calculating depreciation and lease contracts.