CHC claims that one factor in the decision to go with 6 labs is that 6 labs will deter entry by others. They provided the following data to support their claim (the numbers are expected profits):
CHC claims that one factor in the decision to go with 6 labs is that 6 labs will deter entry by others. They provided the following data to support their claim (the numbers are expected profits):
| The Competition | |||
| CHC | Do Not Enter | Enter & Compete | |
| 5 or fewer labs | 30, 0 | 5, 10 | |
| 6 or more labs | 20, 0 | 2,2 | |
Note that CHC has not yet entered the market, so their decision is not yet determined. They are a first-mover, but has not made their first move. After they move, The Competition will move. Given that, what is the outcome of this game? (5 points)
Does either player have a dominant strategy? (5 points)
Is the outcome a Nash Equilibrium? (5 points)
If CHC goes through with the decision to enter with 6 labs as the first mover, what do you expect to happen in the market—what will the competition do, and where will the market eventually settle? (5 points)
Explain how firms can use a commitment to achieve their preferred outcome. Be sure to address the effectiveness of commitments, in particular how sunk cost affects credibility. (15 points)
