Economics 2.3

You are considering entering a market serviced by a monopolist. You currently earn $0 economic profits, while the monopolist earns $100. If you enter the market and the monopolist engages in a price war, you will lose $50 and the monopolist will earn $10. If the monopolist doesn’t engage in a price war, you will each earn profits of $30.

(a) There are two Nash equilibria for the game. What are those? Explain why.
(b) Which one is the subgame perfect equilibrium?

 

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