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slide34-nov23 - ECON 401: Subgame Perfert Nash Equilibrium...

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Unformatted text preview: ECON 401: Subgame Perfert Nash Equilibrium (SPNE) Siyang Xiong Rice University November 23, 2011 Xiong (Rice University) ECON 401 November 23, 2011 1 / 22 Subgame Perfect Nash Equilibrium (SPNE): Example Consider the following game: Firm E (for entrant) is considering entering a market that currently has a single incumbent (&rm I). If it dose so (playing "in"), the incumbent can respond in one of two ways: It can either accommodate the entrant, giving up some of itse sales but causeing no change in the market price, or it can &hgt the entrant, engaging in a costly war of predation that dramastically lowers the market price. Xiong (Rice University) ECON 401 November 23, 2011 2 / 22 Subgame Perfect Nash Equilibrium (SPNE): Example Xiong (Rice University) ECON 401 November 23, 2011 3 / 22 Subgame Perfect Nash Equilibrium (SPNE): Example strategies for &rm E: "in" and "out"; strategies for &rm I: "&ght if in" and "accommodate if in"; the normal-form game representing this extensive form game is: &ght if in accommodate if in in & 3 , & 1 2 , 1 out , 2 , 2 two pure-strategy NE: . out, &ght if in / . in, accommodate if in / Are these NE reasonable? Xiong (Rice University) ECON 401 November 23, 2011 4 / 22 Subgame Perfect Nash Equilibrium (SPNE): Example Suppose &rm E playes "in", how should &rm I play? &ght orSuppose &rm E playes "in", how should &rm I play?...
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This note was uploaded on 02/09/2012 for the course ECON 401 taught by Professor Siyang during the Spring '11 term at Rice.

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slide34-nov23 - ECON 401: Subgame Perfert Nash Equilibrium...

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