1. Consider a market entry game (of complete information) between a start-up and an incumbent.
The start-up first decides whether to enter the market (I) or stay out of it (O). If the start-up
stays out, the game ends with the start-up having 0 payoff and the incumbent enjoys 2 units of
payoff. If the start-up enters the market, then both firms simultaneously choose whether to
fight (F) a price war or to accommodate (A) each other. The payoff matrix for the post-entry
subgame is as follows:
(a) Draw the extensive form game for this situation.
(b) Find all Nash equilibria of the market entry game.
which only the incumbent makes a non-credible threat on an
off-equilibrium path. In other words, all of the start-up's actions in this equilibrium are best responses at
their respective information sets.
(c) Propose a belief for the incumbent that justifies its choice in the aforementioned equilibrium. In
other words, find a belief for the incumbent such that, based on this belief, it is optimal for the
incumbent to choose the strategy in the aforementioned equilibrium.
(d) Solve for all the beliefs that can justify the incumbent's choice in this equilibrium.
(e) Do any of the beliefs you find in (d) satisfy the consistency requirement, which is a part of the
definition of perfect Bayesian equilibrium?
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction
of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice.
Unethical use is strictly forbidden.