1. Strategic Commitment and Entry Deterrence. An Incumbent monopolist (INC) is threatened by an Entrant (E). If the Entrant actually enters, the Incumbent can either Accommodate entry (A) or Fight (F) by starting a price war. Additionally, prior to entry the Incumbent can make itself Aggressive by paying a sunk cost K. Otherwise, it is Passive P ass. The entrant knows whether the Incumbent has played Agg or Pass. Here is the game in extensive form, including payoffs ( E, I ) . NOTE that the Entrants payoff is first! INC INC INC EE (0, M K) (0, M) Agg Pass In Out In Out F A F A ( w, w) ( d , d K) ( w, w) ( d , d )

a. Suppose M = 100, d = 30, and w = 10. What is the equilibrium if K = 0? Find a value of K that such that the Incumbent will deter Entry by playing Aggressive.

b. For unknown values of M, d , and w, solve the game using backward induction. What 2 conditions must be satisfied for entry deterrence to work?

c. Find the range of all values of K that such that the Incumbent will play Agg and deter entry.