Question: An incumbent can commit to producing a large quantity of
An incumbent can commit to producing a large quantity of output before the potential rival decides whether to enter. The incumbent chooses whether to commit to produce a small quantity, qi, or a large quantity. The rival then decides whether to enter. If the incumbent commits to the small output level and the rival does not enter, the rival makes $ 0 and the incum-bent makes $ 900. If it does enter, the rival makes $ 125 and the incumbent earns $ 450. If the incumbent com-mits to producing the large quantity, and the potential rival stays out of the market, the potential rival makes $ 0 and the incumbent makes $ 800. If the rival enters, it loses $ 20, and the incumbent earns only $ 400. Show the game tree. What is the subgame- perfect Nash equilibrium?
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