Game Theory

Entry Deterrence 2: Consider the Cournot duopoly game with demand p = 100 - (q) + q2) and variable costs c;(q;) = 0 for i e (1, 2). The twist is that there is now a fixed cost of production k > 0 that is the same for both firms.c. Now assume that firm 1 is a "Stackelberg leader" in the sense that it moves first and chooses q. Then after observing q , firm 2 chooses q2. Also assume that if firm 2 cannot make strictly positive profits then it will not produce at all. Model this as an extensive-form game tree as best you can and find a subgame-perfect equilibrium of this game for k = 25. Is it unique? d. How does your answer in (c) change for k = 225