Joe's Imports is currently the only dealer for imported Sporto autos on the East Coast, but Fred's Autos may enter the import market and start selling Sporto cars in the East Coast market during the coming year. Joe's Imports can pay the Sporto manufacturer for exclusive East Coast marketing rights, which would deter the entry of Fred's Autos into the market. The payoffs from the possible actions are measured in millions of dollars per year, and the possible outcomes of the sequential entry game are summarized in the following matrix:

What is the equilibrium outcome from this sequential entry game?
A) Joe's Imports buys the marketing rights, and Fred's Autos cannot enter the market.
B) Joe's Imports buys the marketing rights, and Fred's Autos enters the market.
C) Joe's Imports does not buy the marketing rights, and Fred's Autos enters the market.
D) Joe's Imports does not buy the marketing rights, but Fred's Autos does not enter the market.

Question

Joe's Imports is currently the only dealer for imported Sporto autos on the East Coast, but Fred's Autos may enter the import market and start selling Sporto cars in the East Coast market during the coming year. Joe's Imports can pay the Sporto manufacturer for exclusive East Coast marketing rights, which would deter the entry of Fred's Autos into the market. The payoffs from the possible actions are measured in millions of dollars per year, and the possible outcomes of the sequential entry game are summarized in the following matrix:

What is the equilibrium outcome from this sequential entry game?

What is the equilibrium outcome from this sequential entry game?
A) Joe's Imports buys the marketing rights, and Fred's Autos cannot enter the market. 
B) Joe's Imports buys the marketing rights, and Fred's Autos enters the market. 
C) Joe's Imports does not buy the marketing rights, and Fred's Autos enters the market. 
D) Joe's Imports does not buy the marketing rights, but Fred's Autos does not enter the market.

Quizplus · Accepted Answer

In this sequential entry game, Joe's Imports has the first-mover advantage and can choose whether or not to purchase the exclusive East Coast marketing rights. If Joe's Imports buys the rights, Fred's Autos cannot enter the market and Joe's Imports will earn a payoff of $18 million per year. If Joe's Imports does not buy the rights, Fred's Autos can enter the market and Joe's Imports will earn a payoff of $11 million per year.

If Joe's Imports buys the marketing rights, it is in Fred's Autos' best interest not to enter the market, as they will earn $0 million per year. If Joe's Imports does not buy the marketing rights, it is in Fred's Autos' best interest to enter the market and earn $5 million per year.

Therefore, the only equilibrium outcome is for Joe's Imports to buy the marketing rights and for Fred's Autos to not enter the market, resulting in a payoff of $18 million per year for Joe's Imports.

Joe's Imports Is Currently the Only Dealer for Imported Sporto