Firm 1 is a potential entrant into a market where firm 2 is the incumbent. Firm 1 moves first, choosing 'enter' or 'not enter'. If it does not enter, firm 1 gets 0 and firm 2 gets monopoly profit 10. If firm 1 enters, firm 2 chooses 'fight' or 'not fight'. If firm 2 fights, firm 1's profit is and firm 2's is 6; if firm 2 does not fight, firm 1's profit is 2 and firm 2's is 8. Firm 2's strategy of 'fight' is best interpreted as
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Firm 1 is a potential entrant into a market where firm 2 is the incumbent. Firm 1 moves first, choosing 'enter' or 'not enter'. If it does not enter, firm 1 gets 0 and firm 2 gets monopoly profit 10. If firm 1 enters, firm 2 chooses 'fight' or 'not fight'. If firm 2 fights, firm 1's profit is -2 and firm 2's is 6; if firm 2 does not fight, firm 1's profit is 2 and firm 2's is 8. Firm 2's strategy of 'fight' is best interpreted as (A) a commitment (B) a non-credible threat (C) a punitive action (D) acquiescence
Game theory and strategic behaviour has come up 61 times in 6 exams since 2008.
This question is on Extensive-form games and backward induction, part of Game theory and strategic behaviour in Game Theory.
Games played in sequence, solved from the end back to the start.
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Question from the DSE 2010 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.