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Question 2 (15 points) Consider a chain store selling in two markets. . One potential entrant in each market . An entrant first arrives in period 1 with a potential entrant in market 1, and another entrant arrives in period 2 with a potential entrant in market 2. . Consider the following payoffs in each market: 1 Incumbent's profit without entry: M = 100 - Incumbent's profit with entry if incumbent predates: *1 = 40 - Incumbent's profit with entry if incumbent accomodates: * = -10 Entrant's profit with entry: 4 = 40 >0 >= -10 a) Please explain why predatory pricing will not be used in equilibrium to deter entry. Try to recall the logic described in the lecture handout. b) Suppose there is only one period, one market and one potential entrant instead, and that with probability p the incumbent is "strong" and with probability (1) it is "weak". A strong incumbent will predate regardless and a weak incumbent has payoff as described in the question. What is the cutoff value of p above which the entrant will not enter the market. Question 2 (15 points) Consider a chain store selling in two markets. . One potential entrant in each market . An entrant first arrives in period 1 with a potential entrant in market 1, and another entrant arrives in period 2 with a potential entrant in market 2. . Consider the following payoffs in each market: 1 Incumbent's profit without entry: M = 100 - Incumbent's profit with entry if incumbent predates: *1 = 40 - Incumbent's profit with entry if incumbent accomodates: * = -10 Entrant's profit with entry: 4 = 40 >0 >= -10 a) Please explain why predatory pricing will not be used in equilibrium to deter entry. Try to recall the logic described in the lecture handout. b) Suppose there is only one period, one market and one potential entrant instead, and that with probability p the incumbent is "strong" and with probability (1) it is "weak". A strong incumbent will predate regardless and a weak incumbent has payoff as described in the question. What is the cutoff value of p above which the entrant will not enter the market

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