Consider an entry game in a particular market.NW Coffee decides whether to Enter or Not Enter a market.If NW Coffee chooses Not Enter it gets a payoff of 10 and Dunkin' Donuts (DDs) gets a payoff of 30.If NW Coffee enters, DDs can choose to either Punish or to Cooperate.If DDs chooses Punish following Enter, the payoffs are 5 to NW Coffee and 10 to DDs.If DDs chooses to Cooperate following Enter, NW Coffee gets a payoff of 20 and DDs gets 20.What are the subgame (credible) equilibria?
A)(Enter, Punish) and (Not Enter, Cooperate).
B)(Enter, Cooperate).
C)(Not Enter, Punish).
D)(Not Enter, Punish) and (Enter, Cooperate).
E)None of the above.

Question

Quizplus · Accepted Answer

In this game, the subgame perfect equilibrium is (Enter, Cooperate) because if NW Coffee enters, the best response for DDs is to Cooperate, as it gives DDs a higher payoff (20) compared to Punishing (10). This makes entering and cooperating the credible strategy for both parties.

Consider an Entry Game in a Particular Market