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Thread: Game theory: subgame perfect nash equilibrium

  1. #1
    Oct 2010

    Game theory: subgame perfect nash equilibrium

    Consider the situation, where Player X is incumbent monopolist, which makes profit of $10m if left to enjoy its position undisturbed. Player Y is firm that could potentially ENTER the market (E) or STAY out (S). If Y does not enter, it will get profit of $2m. However If Y decides to enter, then the monopolist A can do two things; Fight (F) or Acquiesce (A). If monopolist X chose to fight, both will make zero profit ($0m). If they choose to split the market, they will each make profit of $4m.
    Find the subgame perfect nash equilibrium.

    My answer is for the firm to enter and to Acquiesce. How about your answer? Please do give your opinion on this, thank you.
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  2. #2
    Member rtblue's Avatar
    Mar 2009
    Birmingham, Alabama.
    I do agree with your answer: to enter and Acquiesce. Taking a look at the Prisoner's Dilemma might help you understand why this is so.

    Prisoner's dilemma - Wikipedia, the free encyclopedia
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