Suppose that an industry cartel wishes to keep a new entrant out of an industry. Cartel members can conduct "predatory pricing", where the cartel lowers its price until the entrant leaves, after which it returns it price to the cartel's optimal (monopoly) level. Let the alternative pricing strategy be "accommodation", where the cartel simply acknowledges the entry of the new firm and prices as a duopolist against the entrant. Suppose that the payoffs of predatory pricing versus accommodation are as follows:
New Entrant
Enter Stay Out
Cartel Predate -50, -10 -25, 0
Accom 75, 25 100, 0
a) Draw the sequential game tree (the New Entrant acts first)
b) What is the likely outcome of this game?
c) If the cartel threatens to predate, should the entrant believe the threat