Firm B is the incumbent facing potential entry from its rival; Firm A. Firm A's strategies consist of {Entry, Stay Out}.Firm B's strategies are then {hard if entry; hard if stay out; soft if entry; soft if stay out}.Find the subgame Nash equilibrium to this game, if one exists.
A)Firm A plays {Stay Out}; Firm B plays {Hard if Entry}.
B)Firm A plays {Entry}; Firm B plays {Hard if Entry}.
C)Firm A plays {Entry}; Firm B plays {Soft if Entry}.
D)There is no subgame Nash equilibrium to this game.

Question

Quizplus · Accepted Answer

Firm A's best response to Firm B playing hard is to stay out, and Firm A's best response to Firm B playing soft is to enter. Firm B's best response to Firm A entering is to play soft, and Firm B's best response to Firm A staying out is to play hard. This creates a subgame where Firm A enters and Firm B chooses between playing soft or hard. In this subgame, Firm B's best response is to play soft, as it results in a higher payoff than playing hard. Therefore, the subgame Nash equilibrium is for Firm A to enter and Firm B to play soft if entry.

Firm B Is the Incumbent Facing Potential Entry from Its