Judo Economics Excercise
Business and Management
Submitted By haven7
Consider a game with one incumbent, one potential entrant, and 100 possible buyers. (The incumbent has sufficient capacity to serve all buyers.) The game unfolds in four stages:
In the first stage, the potential entrant must decide whether or not to enter the market. If it enters, it incurs a small, irrecoverable entry cost.
In stage two, the entrant decides simultaneously on two things:
--the number of buyers to target, and
--the price for its product (the price must be the same for all its buyers).
In stage three, the incumbent responds to the entrant’s choices by deciding on a single price at which to offer its own product to all buyers.
In the fourth and final stage, buyers make their purchase decisions, and each firm serves the buyers that decide to purchase from it.
Each one of the 100 potential buyers is interested in purchasing one unit of product from either the incumbent or the entrant. However, only those buyers targeted by the entrant have the option of purchasing from it. To see how this works, think of the buyers as arrayed in a certain order and labeled as buyer 1, buyer 2, …, buyer 100. Suppose, as an example, that the entrant has targeted 10 buyers. Then, buyers 1 through 10 each get to decide whether to purchase from the incumbent or the entrant (or from neither). Buyers 11 through 100 each get to decide whether to purchase from the incumbent (or not at all). This second group of buyers does not have the option of purchasing from the entrant. Likewise, if the entrant has targeted 20 buyers, then buyers 1 through 20 have the option of buying from it; buyers 21 through 100 do...