market with a monopolist and a firm that is considering entry. The new firm
knows that if
“fights” (that is, sets a low price after the entrant comes in), the new firm
money. If the
monopolist accommodates (continues to charge a high price), the new firm will
Enter Don’t Enter
High 20, 10 50, 0
Low 5,-10 10, 0
A. Is the
monopolist’s threat to charge a low price credible? That is, if the entrant has
it make sense for
the monopolist to charge a low price? Explain.
B. What is the Nash
equilibrium of this game?
C. How could the
monopolist make the threat to fight credible?