A gas station at a rest stop along the highway can pay the owner of the rest stop $40,000 to prevent a second station from opening. Without entry, the incumbent gas station's profit is $100,000. With entry, its duopoly profit would be $45,000, and the entrant would earn a profit of $30,000. Will the incumbent pay from exclusivity? Will entry occur? Use a game-tree diagram to answer these questions.

A gas station at a rest stop along the highway can pay the owner of the rest stop $40,000 to prevent a second station from opening. Without entry, the incumbent gas station's profit is $100,000. With entry, its duopoly profit would be $45,000, and the entrant would earn a profit of $30,000. Will the incumbent pay from exclusivity? Will entry occur? Use a game-tree diagram to answer these questions.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter15: Strategic Games

Section: Chapter Questions

Problem 6MC

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