Consider the following multistage (sequential) game. Applebees is an existing fi
ID: 1202799 • Letter: C
Question
Consider the following multistage (sequential) game. Applebees is an existing firm in the market, and Jack’s Diner is a potential entrant. Jack’s Diner must decide whether to enter the market or stay out of the market. If Jack’s Diner decides to enter the market, Applebees must decide whether to engage in a price war or to accept the new entrant.
By playing "price war," Applebees ensures that Jack’s Diner makes a loss of $1 million, but Applebees only makes $1 million in profits. On the other hand, if Applebees plays "accept," each firm earns profits of $5 million. Finally, if Jack’s Diner stays out, it earns zero while Applebees earns $10 million. (It will be helpful to draw out the extensive-form representation of this game. Refer to slides #40-41.)
If Jack's Diner plays enter, Applebees will _________________.
63
Using the information in the above question #5, what is the Nash equilibrium of this game?
A.play "price war."Explanation / Answer
Player 2
(Applebees)
Price War Accept Backout
Player 1 (+1,-1) (5,5) (10,0)
Jack's Diner enters market,then disregard the backout option.This leaves Applebees with either going for a price war or to accept.
Applebees would accept since there would be greater profit.
Ans is B
Nash equillibrium is at A