15-6 Entry Game With Withdrawal

In the text, we considered a sequential move game in which an entrant was considering entering an industry in competition with an incumbent firm (Figure 15-1). Consider now that the entrant, if fought, has the possibility of withdrawing from the industry (at a loss of one for the entrant and a gain of eight for the incumbent) or staying (at a loss of five for each player). What is the equilibrium of this game? Discuss whether the entrant is better off with or without the ability to withdraw.