Consider the following game. First, an incumbent monopolist sets a price for its product, either high or low. Then, a potential entrant observes the monopolist's choice and decides to enter the market or to stay out. The monopolist is either low cost or high cost. The entrant does not know which: the monopolist could be low or high cost with equal probability.

If the entrant does not enter, then the monopolist obtains the monopoly profits, which depend on the chosen price and the cost type. If the entrant does enter, the competition forces the monopolist to obtain different profits. The payoffs for the low-cost and high-cost monopolist and the entrant are summarized in the payoff matrices below. The row player is the monopolist and the column player is the entrant.

Low-cost Monopolist Enter Stay Out High price 50, -10 200, 0 Low price 10, -25 150, 0 High-cost Monopolist Enter Stay Out High price 10, 70 100, 0 Low price -10, 50 0, 0