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In our Managerial Economics textbook, we consider a sequential-move game in which an entrant is considering entering an industry in competition with an incumbent firm (see Figure 15-1). There are several possibilities of how this sequential game will be played. We want to use the Froeb rule of "look ahead and reason back." Also see the help provided in the discussion preparation. Instructions For your discussion post, use Figure 15-1 from the textbook as your starting point to address the following: Play and analyze the game. Can, and how does, the entrant succeed? Is the incumbent ever in control of this game? What is the Nash equilibrium? You may wish to review the old game known as Duopoly, as well as Antoine-Augustin Cournot, to help inform your post. To earn full credit for your discussion, you must complete one post and one follow-up or reply to a classmate. Make sure both the post and the reply focus on the questions asked. This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

Paper For Above instruction

In the context of managerial economics, understanding the strategic interactions between an entrant and an incumbent firm within an industry involves analyzing sequential-move games. These games are often represented through extensive form diagrams, such as Figure 15-1 in the textbook, which illustrates the possible actions and payoffs for each player at different points in time. The core objective of such analysis is to determine the optimal strategies for both players, assess the likelihood of the entrant's success, and understand the role of control and equilibrium outcomes in shaping industry competition.

The sequential-move game typically begins with the entrant's decision to enter the market. The entrant's success depends on multiple factors, including the incumbent's response, potential retaliation, and the overall market conditions. Using the "look ahead and reason back" approach, or the Froeb rule, the entrant evaluates future responses of the incumbent and assesses whether entry yields higher profits than abstention. This backward induction process involves analyzing the potential subgames starting from the final moves and determining the optimal strategies at each stage.

Within this strategic framework, the incumbent firm can exert control if it possesses the ability to influence the subsequent choices of the entrant. For example, the incumbent might commit to certain strategies, such as aggressive price cutting or capacity expansion, to deter entry. In some cases, the incumbent's commitment to preemptive actions can shift the subgame perfect equilibrium, giving the incumbent control over the game's outcome. Conversely, the entrant's ability to succeed hinges on whether it can credibly threaten or promise particular responses to the incumbent's moves.

The Nash equilibrium in this context is often derived through backward induction, with the subgame perfect equilibrium serving as a refinement. This equilibrium indicates the set of strategies where neither player has an incentive to deviate, given the other player's strategy. Depending on the specifics of the payoffs and strategic options, the equilibrium can manifest as a first-mover advantage for the incumbent, a credible threat for the entrant, or a mixed strategy equilibrium where both players randomize their choices.

Historical and theoretical models such as Cournot’s duopoly help illuminate these dynamics. Cournot's model emphasizes quantity competition where firms choose output levels simultaneously, but its extension to sequential moves helps analyze real-world entry scenarios. The analysis reveals that entry barriers, capacity constraints, and strategic commitments play vital roles in determining whether the entrant can succeed or whether the incumbent maintains control of the game. Ultimately, the success of an entrant depends on the strategic environment and the extent to which the incumbent can leverage control or strategic commitments to deter entry.

References

• Fudenberg, D., & Tirole, J. (1991). Game Theory. MIT Press.
• Cournot, A. A. (1838). Recherches sur les principes mathématiques de la théorie des richesses. Hachette.
• Froeb, L. M., McCann, M., Shor, M., & Ward, M. R. (2015). Managerial Economics. Houghton Mifflin Harcourt.
• Tirole, J. (1988). The Theory of Industrial Organization. MIT Press.
• Vives, X. (1999). Oligopoly Pricing: Old Ideas and New Tools. MIT Press.
• Porter, M. E. (1980). Competitive Strategy. Free Press.
• Sutton, J. (1991). Sunk Costs and Market Structure. MIT Press.
• Nelson, R. R., & Winter, S. G. (1982). An Evolutionary Theory of Economic Change. Harvard University Press.
• Stiglitz, J. E. (1987). The Relevance of the New Industrial Organization. The American Economic Review, 77(2), 114-119.
• Bresnahan, T. F., & Reiss, P. C. (1991). Entry and Competition in Concentrated Markets. The Journal of Political Economy, 99(5), 977-1009.