What is the subgame-perfect equilibrium outcome

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Entry Deterrence 1: NSG Corporation is considering entry into the local phone market in the San Francisco Bay Area. The incumbent, S&P Corporation, predicts that a price war will result if NSG enters. If NSG stays out, S&P earns monopoly profits valued at $10 million (net present value of profits) while NSG earns zero. If NSG enters, it must incur irreversible entry costs of $2 million. If there is a price war, each firm earns $1 million. S&P always has the option of accommodating entry (i.e., not starting a price war). In such a case both firms earn $4 million (net present value). Suppose that the timing is such that NSG first has to choose whether or not to enter the market. Then S&P decides whether to "accommodate entry" or "engage in a price war." What is the subgame-perfect equilibrium outcome to this sequential game? Set up a game tree.

Reference no: EM131245832

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