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Problem 4: Firms 1 and 2 compete in a market and presently get a payoff of 100 each. Firm 1 can either choose to start
Problem 4: Firms 1 and 2 compete in a market and presently get a payoff of 100 each. Firm 1 can either choose to start a price war (W) or not (N). If a price war is not started, each rm continues to get a payoff of 100. If a price war is started, rm 2 may either reSpond (R) or back off (B) If it backs off, rm 1 gets payoff 200 and rm 2 gets 50. If it responds, each rm gets payoff 40. (a) If rm 2 threatens to respond, is its threat credible? Explain. (b) Suppose that if rm 2 reSponds, each rm's payoff is X (which is less than 100, but not equal to 40). Suggest a value of X for which rm 2's threat to respond is credible. (c) Suppose that if rm 2 responds, each rm's payoff is the value of X that you suggested in the previous part. In the backward induction outcome, does rm 1 start the price war
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