7:33PM Wed Apr 10 & moodle.concordia.ca 2. Consider the following entry deterrence model. An entrant makes an initial decision either to enter or not into some industry. The incumbent observes this decision and subsequently de- cides either to compete aggressively with the entrant, or to accommodate the entrant and not compete aggressively. Suppose that aggressive competition pays both firms a profit of -1. Non aggressive competition pays each firm a profit of 2. If the entrant stays out then the entrant earns zero profit elsewhere and the incumbent earns a monopoly profit of 5. In this framework, entry deterrence can be thought of as an initial threat from the incumbent to compete aggres- sively should entry arise. (35 pts) a) Present this game information in an extensive form. b) Can entry deterrence arise in equilibrinm in this game? Explain. c) Now suppose that we repeat this sequential game once. After the first period the entrant decides to either be in the industry or not. Then the incumbent decides how to react if the entrant enters or stays in. Now there can be a reward for aggressive competition, because if the entrant exits between periods the incumbent earns monopoly profit in the final period. Can we have an equilibrium outcome where firm 1 competes aggressively in the initial period in reaction to entry, and threatens to continue competing aggressively if the entrant stays in? Explain. R T78