An incumbent firm in an industry faces the possibility of entry by a challenger. First the challenger chooses whether to enter or not. If it does not enter, neither firm has any further action; the incumbent's payoff is T M (it obtains the monopoly profit, M, for each of the following T 1 periods) and the challenger's payoff is zero. If the challenger enters, it pays an entry cost, f > 0, and in each of the T periods, the incubment first commits to fight or cooperate with the challenger in that period, then the challenger chooses whether to stay in the industry or to exit. (Note the order of the moves in any given period in this game is different from problem 1.) If, in any period, the challenger stays in, each firm obtains, in that period, the profit of F < 0 if the incumbent fights and C > M ax{F, f} if the incumbent cooperates. If, in any period, the challenger exits (it cannot re-enter), both firms obtain the profit of zero in that period (regardless of the incumbent's action); and in subsequent periods, the incumbent obtains M > 2C and the challenger receives zero