Burger Doodle,the incumbent firm,wishes to set a limit price of $8 (rather than the profit-maximizing price of $12) to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10.
In order for Burger Doodle to successfully implement a limit pricing strategy for entry deterrence,it must be able to
A) convince Designer Burger that it will set the Nash price of $10 should Designer Burger decide to stay out of the market.
B) convince Designer Burger that it will set the Nash price of $10 should Designer Burger decide to enter the market.
C) make a credible commitment to maintain its initial price should Designer Burger decide to enter the market.
D) make a credible promise to price its burgers at $12.
E) make a credible threat to lower its price to $8 should Designer Burger choose to enter it market.
Correct Answer:
Verified
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