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

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ECON 401: Subgame Perfert Nash Equilibrium (SPNE) Siyang Xiong Rice University November 23, 2011 Xiong (Rice University) ECON 401 November 23, 2011 1 / 22
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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
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Subgame Perfect Nash Equilibrium (SPNE): Example Xiong (Rice University) ECON 401 November 23, 2011 3 / 22
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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 0 , 2 0 , 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
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Subgame Perfect Nash Equilibrium (SPNE): Example Suppose °rm E playes "in", how should °rm I play? ± °ght or accommodate?
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