Consider the following entry game: Firm B is an existing fi…
Consider the following entry game: Firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play “enter”) or stay out of the market (play “not enter”). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play “hard”) or not engage in a price war (play “soft”). If firm B plays “hard,” firm A makes a loss of $2 million, but firm B only makes $2 million in profits. On the other hand, if firm B plays “soft,” firm A as the new entrant takes half of the market, and each firm earns profits of $4 million. If firm A does not enter , it earns zero profits while firm B earns $8 million. Which of the following is a Subgame Perfect Equilibirum?