A gas station at a rest stop along the highway can pay the owner of the rest stop $ 40,000 to prevent a second station from opening. Without entry, the incumbent gas station’s profit is πi = $ 100,000. With entry, its duopoly profit would be $ 45,000 and the entrant would earn a profit of $ 30,000. Will the incumbent pay for exclusivity? Will entry occur? Use a game- tree diagram to answer these questions.
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