6. Consider a market with a monopolist and a firm that is considering entry. The new firm knows that if the monopolist “fights” (i.e., sets a low price after the entrant comes in), the new firm will lose money. If the monopolist accommodates (continues to charge a high price), the new firm will make a profit.

a. Is the monopolist’s threat to charge a low price credible? That is, if the entrant has come in, would it make sense for the monopolist to charge a low price? Explain.

b. What is the Nash equilibrium of this game?

c. How could the monopolist make the threat to fight credible?

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MONOPOLIST PRICE HIGH PRICE LOW ENTER 20, 10 5,-10 Entrant DON'T ENTER 50,0 10,0