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1. What is the equilibrium outcome to the Stackelberg game if the absolute value of the slope of firm 2's best-response function exceeds 1? Why?
2. The Lochend Luing Ranch operates a slaughterhouse in Dog Pound. Business has been very profitable. However there are dark clouds on the horizon. Bell L Ranches is considering entering the lucrative meat market in Dog Pound. The profits of Lochend Luing Ranch (LLR) if it is a monopolist are 15; if Bell L enters and LLR accommodates and shares the market the duopolyprofits for each are 5; if Bell L enters and LLR launches a price war, both firms earn -1.
(a) Draw the game tree for this situation and determine the outcome.
(b) Launching a price war involves not only charging a very low price, but also printing circulars to inform the public of the great deals available. Suppose that the situation is identical to that in (a), but that LLR can print its flyers up before Bell L makes its entry decision. The cost of printing up flyers is 8. Draw the game tree for this situation and determine the outcome.
(c) What does your answer to (b) imply about the relationship between sunk costs, first-moveradvantages, and entry deterrence.
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