Economics

View Attachment for Figure 5.1

In the text, we considered a sequential-move game in which an entrant was considering entering an industry in competition with an incumbent firm (Figure 15-1). 

Consider now that the entrant, if fought, has the possibility of withdrawing from the industry (at a loss of 1 for the entrant and a gain of 8 for the incumbent), or staying (at a loss of 5 for each player). 

What is the equilibrium of this game? 

Discuss if the entrant is better off with or without the ability to withdraw.