An incumbent firm (player 1) is either a low-cost type (01 = 0L) or a high-cost type (0₁ = 0H), each with equal probabil

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An Incumbent Firm Player 1 Is Either A Low Cost Type 01 0l Or A High Cost Type 0 0h Each With Equal Probabil 1 (40.13 KiB) Viewed 16 times

An incumbent firm (player 1) is either a low-cost type (01 = 0L) or a high-cost type (0₁ = 0H), each with equal probability. In period t = 1 the incumbent is a monopolist and sets one of two prices PL or PH, and its profits in this period depend on its type and the price it chooses, given by the following table: Type Profit from PL Profit from PH OL 6 8 OH 1 5 After observing the period t = 1 price, a potential entrant (player 2), which does not know the incum- bent's type but knows the distribution of types, can choose to enter the market (E) or stay out (0) in period t = 2. The payoffs of both players in period 2 depend on the entrant's choice and on the incumbent's type and are given by the following table: Incumbent's type Entrant's choice Incumbent's payoff Entrant's payoff E 0 OL -2 0 8 0 E 0 1 0 5 OH 0 (a) Draw the extensive-form game tree of this game. (b) Find all pooling and separating perfect Bayesian equilibrium of the game. OL OH