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the strategic enviromnent, i.e., Firm I determines the game stages and the sequence of moves. The strategic environment is as follows. In Stage 1, Firm

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the strategic enviromnent, i.e., Firm I determines the game stages and the sequence of moves. The strategic environment is as follows. In Stage 1, Firm I makes a non-binding announcement about its output level. It may announce that unless Firm A produces no goods and leaves the market (thus allowing Firm I to be a monopolist), it will \"ood the market\" by producing an output of 1 and will therefore drive the price to zero; or, it may announce its intention to share the market with Firm A by producing an output of 1f6. In Stage 2, after observing Finn I's announcement, Firm A decides whether to remain in the market and produce an output of M5, or to leave the market. Firm A's decision is observed by Firm I. If Firm A decides to leave the market, the game ends. Otherwise, Stage 3 starts. In Stage 3, Firm I chooses its output level. It may decide to fulll its announcement and produce and output of l; or it may decide to produce an output of U6. a. Represent this strategic environment in an extensive form and characterize the SPNE for this game. Provide intuitive explanation regarding your results. b. Suppose that FirmI hires you as a business consultant to evaluate the current strategic environment. Would you recommend any changes in the strategic environment? Explain

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