Consider the following market game:

An incumbent firm, called firm 3, is already in an industry. Two potential entrants, called firms 1 and 2, can each enter the industry by paying the entry cost of 10. First, firm 1 decides whether to enter or not. Then, after observing firm 1’s choice, firm 2 decides whether or not to enter. Every firm, including firm 3, observes the choices of firm 1 and 2. After this all of the firms in the industry (including firm 3) compete in a Cournot Oligopoly, where they simultaneously and independently select quantities. The price is determined by the inverse demand curve p = 12 –Q, where Q is the total quantity produced in the industry. Assume the firms produce at no cost in this cournot game. Thus if firm i is in the industry and produces qi, then it earns a gross profit of (12-Q) qi in the cournot phase. (Remember that firms 1 and 2 have to pay fixed cost 10 to enter.)

Required:

Compute the equilibrium of this market game.

Answer rating: 100% (QA)

Firm 1s profit if it enters 12q1q2q3q1 10 Maximizing it 12 2q1 ... View the full answer