There are two incumbent firms, F1, F2 and also a potential entrant, F3. The steps of the game are: 1. F1 and F2 simultaneously choose outputs q1 E R, and 92 E R+ re- spectively. 2. F3 observes q1, 92 and then chooses whether to enter the industry. If she does not, then 93 = 0 and she gets a payoff of zero, but. .. 3. if she has entered the industry, F3 chooses her own output level, 93 E Inverse demand is p = 12 - q1 - 92 - 93. Production costs are zero, but F3 would have to incur a fixed investment cost of 4 in order to enter the industry