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Suppose that the software market currently has only one firm operating - microhard. A new firm Newvell could enter the industry. Each firm requires $80 million, to operate in each period. The game lasts for two periods and in each of these two periods, Newvell will earn either $200 million or $40 million, depending on whether the market was good or bad, respectively in that period. The probability of the market being good is 0.25. Microhard can self-finance this operating cost but Newvell needs to borrow money from a bank at a competitive rate?

Macroeconomics, Economics

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