1.10. Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company’s profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price:

Big Brew threatens Little Kona by saying, “If you enter, we’re going to set a low price, so you had better stay out.” Do you think Little Kona should believe the threat? Why or why not? What do you think Little Kona should do?

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Little Kona High Price Big Brew Brew makes $3 million Low Price Brew makes $1 million Enter Kona makes $2 million Brew makes $7 million Don't Enter Kona makes zero Kona loses $1 million Kona makes zero Brew makes $2 million