At p.216 BVDF you can read Pre-commitments must be irreversible, otherwise they are an empty threat....

 

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At p.216 BVDF you can read "Pre-commitments must be irreversible, otherwise they are an empty threat." Consider the following example similar to the one presented in lecture (see the game tree below, where the first number stands for firm B's payoffs) and assume that the firm can easily recover the sum spent on the construction of the large plant (i.e. the expenditure is not irreversible). Draw the game tree corresponding to the reversible case and find the resulting equilibrium using backward induction. Compare with the outcome discussed in BVDF and explain, why "pre-commitments must be irreversible." A Small Plant Large Plant Enter B Stay Out (0,12) Enter B Stay Out (0,11) Fight A Accept A Fight Accept (-2,5) (6,6) (-2,4) (6,3) At p.216 BVDF you can read "Pre-commitments must be irreversible, otherwise they are an empty threat." Consider the following example similar to the one presented in lecture (see the game tree below, where the first number stands for firm B's payoffs) and assume that the firm can easily recover the sum spent on the construction of the large plant (i.e. the expenditure is not irreversible). Draw the game tree corresponding to the reversible case and find the resulting equilibrium using backward induction. Compare with the outcome discussed in BVDF and explain, why "pre-commitments must be irreversible." A Small Plant Large Plant Enter B Stay Out (0,12) Enter B Stay Out (0,11) Fight A Accept A Fight Accept (-2,5) (6,6) (-2,4) (6,3)

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