Firm B

Enter Don't Enter

Low Price (3,21) (3,1)

Firm A High Price (4,5) (6,3)

Show how the payoff matrix in the table for Problem 10 might change if firm A were to make a credible threat to lower the price by building excess capacity to deter frim B from entering the market.

(a) indicate the best strategy for each firm.

(b) Why is the entry-deterrent threat by firm A to lower the price not credible to firm B?

(c) What could firm A do to make its threat credible without building excess capacity?