Firm 1 has a first-mover advantage from research that resulted in a new cost-saving technology and lower costs of production than potential rivals. This monopolist could even sell at a price so low that other potential competitors with higher costs would lose money and not enter the market. If a potential entrant expects the incumbent to produce a large quantity, it does not enter. The table below shows the profits each firm would make on the various possible outcomes. Draw a game tree to determine if the incumbent might produce even more than the monopoly quantity in the first period. What is the equilibrium?

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Incumbent Rival Monopoly output, no entry 300 0 Monopoly output, entry 169 50 Large output, no entry 232 0 Large output, entry 51 -1