QUESTION 11

Consider an industry that consists of two firms, Alpha and Beta, that produceidentical products.Suppose that Alpha seeks to preempt Beta by making its capacity decisiona year before Beta's. Thus, by the time Beta makes its decision, it will have observedAlpha's choice and must adjust its decision making accordingly.We will assume that each firm always produces at full capacity.Thus, expansion of capacity entails a trade-off. The firm may achieve a larger share ofthe market, but it may also put downward pressure on the market price. The consequencesof each firm's choices are described in the game tree below.Eachfirm chooses among three options: no expansion of current capacity, a smallexpansion,or a large expansion.What is the rollback equilibrium of this game?

D stands for Do not Expand,S stands for Small, and L stands for Large.

QUESTION 11 4 points Save Answer Consider an industry that consists of two rms, Alpha and Beta, that produce identical products. Suppose that Alpha seeks to preempt Beta by making its capacity decision a year before Beta's. Thus, by the time Beta makes its decision, it will have observed Alpha's choice and must adjust its decision making accordingly. We will assume that each rm always produces at full capacity. Thus, expansion of capacity entails a trade-off. The rm may achieve a larger share of the market, but it may also put downward pressure on the market price. The consequences of each m'l's choices are described in the game tree below. Each rm chooses among three options: no expansion of current capacity, a small expansion, or a large expansion. What is the rollback equilibrium of this game? D stands for Do not Expand, 5 stands for Small, and L stands for Large. Do Not Expand (SIS, SIS) ($15. $20) ($9. $18) ($20, $15) ($16. $16) (:8. $12) (sis, sin (:12. 58) ($0. 50) D (L; SSD} D (L: 555} Cl {5; LLS} D (D: LLL}