The more an incumbent firm produces in the first period, the lower its marginal cost in the second period. If a potential rival expects the incumbent to produce a large quantity in the second period, it does not enter. Draw a game tree to illustrate why an incumbent would produce more in the first period than the single- period profit- maximizing level. Now change the payoffs in the tree to show a situation in which the firm does not increase production in the first period.
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