The Problem is premised on the following phased structure; | Decision Maker | Decisions To Be Made | Stage 1 | Entrant | Whether to enter or opt out | Stage 2 | Entrant | Set up the price(Pe) and the number of target customers(T) | Stage 3 | Incumbent | Whether to fight or accommodate;
1) Price war
2) Set up the price for remaining customers (100-T) | Stage 4 | Buyer | Consumers buy from whoever offers them the highest surplus.
There is no cost to capacity. |
The Entrant’s strategy in Q No.1-3 have been chalked out through the technique of “looking forward and reasoning backward” i .e. in the light of what the other party namely Incumbent may do under different circumstances
QUESTION 1: …show more content…
Pe = 160 – T Let the profit for the entrant be ∏e, then ∏e = (Pe – C) x T ----------------------------  ∏e = (160- T- 120) x T ∏e = (40- T) x T
For profit maximization, the relevant value of T can be calculated as under d∏e /dT = (40- T) – T=0 T=20 Therefore the maximizing price will be Pe== 160 – 20 = $140
This means that the maximum payoff for the Entrant is when he targets 20 customers at a price of $140 or less without causing Incumbent to retaliate. And the maximum payoff (as per  above) for serving 20 customers will be (140 – 120) x 20 = $400.On the other hand, the incumbent will decide to accommodate with price of 200 targeting 80 customers and reaping a profit of [(200 – 100) x 80 = $8000].
* Each buyer is willing to pay $200 for one unit of the Incumbent’s (I) AND the Entrant’s (E) product * I and E have a $120 and $80 unit cost