The relevant geographic market for petrol in the Aegean is divided into two regions (segments): North Aegean and South Aegean. The relevant product market in each region yields a total annual profit of €100,000. Currently, during 2020, GasOne owns the only petrol station in North Aegean and the only petrol station in South Aegean.
Another company, called GasTwo, is considering entering into the North Aegean’s market segment in 2021. Extensive analyses have shown that running a petrol station in South Aegean in 2021 generates a negative present value for GasTwo.
If GasTwo enters the North Aegean’s market segment, it has to incur a startup license fee equal to €25,000 which must be paid upon entry.
If GasTwo enters the North Aegean’s market segment, GasOne and GasTwo will equally share the profit from the relevant market segment.
If GasTwo makes a positive profit in North Aegean, it will then open a petrol station in South Aegean in 2022, paying the license fee of €25,000 upon entry.
However, if GasTwo suffers losses in North Aegean it will not open a petrol station in South Aegean.
To deter GasTwo’s entrance in either region, GasOne’s executives plan to initiate a price war lasting for two years: If GasTwo opens a petrol station in a region, GasOne will lower prices in that region, forcing GasTwo to do the same, to the point where each firm’s profits from petrol sales in the region drop to zero.

a) Represent the above sequence of decisions in an extensive form game by estimating, for each firm, the sum of profits from North Aegean and South Aegean, for 2021 and 2022 respectively. [Hints: (a) You must provide all the necessary calculations for the entries of the game tree. (b) Each firm’s profits for 2022 must be calculated without any discount.]

b) Use backward induction to find the Subgame Perfect Nash Equilibrium (SPNE) of the game.

c) Does the price war strategy employed by the GasOne constitute a credible threat?

d) Describe GasOne’s strategic move that may help it obtain higher profit and provide a numerical example. [Hint: Feel free to assume any possible scenario including inter alia threat, promise, commitment if it changes the SPNE of the game]