Consider the following version of the "chain store paradox". This entry game has the following timing: In the first stage an entrant decides whether or not to enter. In the second stage, if there is entry, the incumbent decides whether or not to prey (fight the entrant by launching a price war - predatory pricing) or accommodate. The payoff matrix is as follows:
Entrant
Enter Stay Out
Incumbent Prey -1, -1 11, 0
Accommodate 3, 3 11, 0
a) Find the two Nash equilibria for this game.
b) Draw the game tree for this game and solve.
c) Consider: the outcome for (Prey, Enter) is the following game:
Play nice Fight
Play nice 2, 2 -2, 0
Fight 0, -2 -1, -1