Consider a market with a monopolist and a firm that is considering entry. The new firm knows that if the monopolist "fights" (i.e., sets a low price after the entrant comes in), the new firm will lose money. If the monopolist accommodates (continues to charge a high price), the new firm will make a profit.

a. Is the monopolist€™s threat to charge a low price credible? That is, if the entrant has come in, would it make sense for the monopolist to charge a low price? Explain
b. What is the Nash equilibrium of this game?
c. How could the monopolist make the threat to potential credible?

Transcribed Image Text:

Entrant PRICE HIGH PRICE Low ENTER 20, 10 5,-10 DON'T ENTER 50, 0 10, 0 MONOPOLIST