[8.] There are two firms (A and B) considering whether or not to enter a new mar

Question

[8.] There are two firms (A and B) considering whether or not to enter a new market. The market is only big enough to support one of the two firms. If both firms enter the market, then they will both make a loss of $10 million. If only one firm enters the market, that firm will earn a profit of $50 million and the other firm will earn zero. If they both decide not to enter then they both earn zero. We assume that firm B observes whether firm A has entered the market before it decides what to do.

Explanation / Answer

a) Nash equilibria : In this case both firms get more than 0 profits only in two situation where one enters and the other does not . So ( enter , don;t enter ) and ( don't enter , enter ) are the best strategies they can take . Hence these both are nash equilibria . Any deviation from these fetches them 0 profits .

b) There will be monopoly in Klamath Falls . Either of the firm will enter and pay off the other one to keep it from entering the market . Either Dutch Bros or Starbucks any one will enter and own the store .

c) New nash equilibrium : ( Enter , Enter )= ( 2,2)

d) There will be duopoly . There will be two stores of both firms . Each earning profit = 2 .

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