Consider an economy with two firms. Firm 1 has a monopoly of a certain commodity in one particular country. Firm 2 is considering the possibility of entering the market. Firm 2 knows that , at the same time, firm 1 might perhaps prepare itself for eventual competition by making an investment to improve its distribution channels. However, firm 2 does not know whether the investment needed for this improvement is large or small. Firm 2 believes that the probability that firm 1 has to make a large investment is p ? (0, 1). The belief is based on objective facts that are publicly known. The game table in both scenarios ,i.e., Firm 1 Large(L) or Small (S) is given in Figure 1. I and NI stand for Invest and Not Invest respectively and E and NE stand for Enter and Not Enter respectively.

(a) Set up this situation as a Bayesian Game ,i.e., state the essential components of the game clearly in the form of a Bayesian game.

(b) Compute all the pure strategy Bayes Nash Equilibria of the game above.