Consider the following entry game: Here,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 (play "soft").By playing "hard," firm B ensures that 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," the new entrant takes half of the market,and each firm earns profits of $4 million.If firm A stays out,it earns zero while firm B earns $8 million.Which of the following are Nash equilibrium strategies?
A) (enter, hard) and (not enter, hard)
B) (enter, soft) and (not enter, soft)
C) (not enter, hard) and (enter, soft)
D) (enter, hard) and (not enter, soft)

Question

Quizplus · Accepted Answer

A Nash equilibrium occurs when no player can benefit by changing their strategy while the other player's strategy remains unchanged. In this scenario, "(not enter, hard)" is a Nash equilibrium because if Firm A decides not to enter, its best response is to earn $0 instead of losing $2 million, and Firm B's threat of playing "hard" deters Firm A from entering. "(enter, soft)" is also a Nash equilibrium because if Firm A enters, Firm B's best response is to play "soft" to avoid earning only $2 million in a price war, resulting in both firms earning $4 million.

Consider the Following Entry Game: Here,firm B Is an Existing