23 Entry Deterrence Blockaded Entry: If F > 4, the potential entrant would not enter even if the incumbent fails to get an exclusive right. The Nash equilibrium is (Don’t Pay, Don’t Enter).Deterred Entry: If F < 4 and 10 –b > 4, then Incumbent will pay $b to exclude the potential entrant. The Nash equilibrium is (Pay, Don’t Enter). Accommodated Entry: If F < 4 and 10 –b < 4, the Nash equilibrium is (Don’t Pay, Enter).
24 Investing to Deter Entry An incumbent (monopoly) decides whether or not to invest in capital that reduces its MC of production, and hence produce more. Looking at the incumbent’s choice, the potential entrant decides whether or not to enter the market. If incumbent doesn’t invest, the potential entrant enters ($4 > 0). If the incumbent invests, the entrant doesn’t enter (0 > -1).
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25 Investing to Deter Entry EntrantEntrantIncumbentNo InvInvestNOEnterNOEnter10, 04, 42, - 18, 0Inc, EntOut of the two possibilities (blue lines), Incumbent is better off choosing Invest. So (Invest, Don’t Enter) is the Nash Equilibrium.