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