The game theory includes studying the choices strategy amongst two or more actors given a condition where there are payoffs and rules. The sequential-move game entails one player deciding their action before identifying what their rival’s action would be. An individual starts the game before the opponent decides on the reaction to that person. Considering figure 15-1, the entrant into an industry with one incumbent makes a move before the incumbent’s response (Freob et al., 2018). Here, the entrant has two options that determine success, including joining the market or withdrawing. Meanwhile, the incumbent can either fight or accommodate the entrant.
As per figure 15-1, the payoff for the choice to enter the market and be accommodated is 5 for both companies, and incumbent fighting yields -5 for both. Meanwhile, the entrant deciding to withdraw has a payoff of 0 for the entrant and 10 for the incumbent. According to Froeb et al.’ s (2018) equilibrium rule ‘look ahead and reason back,’ the entrant will know that by looking ahead that joining the market would yield 5 or lose 5 depending on the reaction of the incumbent. However, reasoning back helps the entrant predict the incumbent’s action by examining the subsequent payoff for each reaction.
The entrant considers entering the market because not entering has a payoff of 0. Meanwhile, the entrant weighs that the incumbent will accommodate because it will yield 5 against fighting that attracts a loss. In this, the entrant succeeds by joining the market as this strategy depicts. All in all, the incumbent’s control (deciding whether to fight or accommodate) comes after the decision for the entrant to join the market. Thus, the incumbent’s control can only follow the entrant’s move to join the market.
Your post was adequate in revealing how strategy helps competing firms play their game with the aim of success for both sides. Yes, I agree that the incumbent firm hurts its interests when it threatens to fight any entrant because this, as figure 15-1 of the textbook indicates, can only lead to losses (Freob et al., 2018). One of the examples would be figuring out to discourage new entrants by lowering prices. In one way or the other, this example is enlightening. An existing company enjoying enormous profits might not achieve much from lowering its prices as a strategy to make new entrants lose business or fail to thrive in the industry. Truly, I now imagine that the company could end up making losses instead of setting accommodating approaches that would allow both firms to profit.
Indeed, your illustration of the Cournot duopoly in which firms with identical functions and products in the same market achieve maximum profits. For example, this is done by determining an optimal price for both firms while emphasizing the concept of business success amidst competition. I know some small businesses that thrive on market share and profitability after opening up to new entrants for purposes of satisfying the excessive demand for their products. I believe that competition is essential for business growth. In most cases, competition helps businesses to increase their presence on awareness and market penetration. It influences businesses to increase product quality and better prices. Thus, it is because of competition that consumption increases and the company can satisfy customer needs and service, which also creates business efficiency.
Reference
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial economics: A problem solving approach (5th Ed.). Cengage Learning.