In the scenario, a new company is considering whether to enter a monopolistic market that is dominated by an incumbent firm. In this case, the entrant would opt not to enter the market. The entrant’s only options if resisted by the incumbent are a loss of 5 or 1. This implies that should they enter the market, they can make either a profit of $0 or a loss of 5. Both options are unfavourable for the business. On the other hand, the inclement has a gain of 8 if they respond aggressively and a loss of 5 if they accommodate the entrant. Based on these possible outcomes, the incumbent would most certainly be aggressive to maintain their market dominance and higher revenues ( Aguirregabiria & Suzuki, 2016). In any business situation, choosing a gain of 8 over a loss of 5 is a pragmatic approach
The equilibrium is the decision with which each player maximizes their outcome and payoff with the consideration of the subsequent actions of the other player. In this case, the equilibrium of the game would be the withdrawal of the entrant and take a loss of 1. The equilibrium outcome would be (0, 10). The incumbent would continue enjoying their market dominance with a gain of 8. This outcome is favourable for both players ( Geckil & Anderson, 2016).
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The entrant is better off if they use their ability to withdraw. By withdrawing, they are incurring less loss than they would if they opted to stay. Although the loss for both companies would be the same if the entrant stayed, the venture would be costlier for the entrant in the long run because the incumbent has benefited from the venture already. In a situation where both withdrawing and staying leads to a loss, the option with less loss presents the better option. Using the strategies of rationality and maximization, the entrant would not opt for an option that results in higher loses for the incumbent, because this would translate to more lose for them, but the alternative that minimizes loses for them even if it makes the incumbent gain ( Elsadany, 2017). In any case, the incumbent was already gaining before their entry, and their withdrawal would therefore not affect them.
References
Aguirregabiria, V., & Suzuki, J. (2016). Empirical games of market entry and spatial competition in retail industries. Handbook on the Economics of Retailing and Distribution , 201 , 201-232.
Elsadany, A. A. (2017). Dynamics of a Cournot duopoly game with bounded rationality based on relative profit maximization. Applied Mathematics and Computation , 294 , 253-263.
Geckil, I. K., & Anderson, P. L. (2016). Applied game theory and strategic behavior . Chapman and Hall/CRC.
