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ECSG | Group No. 27
1) In the first stage, the potential entrant must decide whether to enter the market. If it enters, it incurs a
nominal, irrecoverable entry cost.
2) In stage two, the entrant decides simultaneously on how many buyers to target and on a single price at
which to offer its product to the buyers it is targeting.
3) In stage three, the incumbent responds to the entrants choices by deciding on a single price at which to
offer its own product to all buyers.
4) In the fourth and final stage, buyers make their purchase decisions, and each company serves the buyers
that decide to purchase from it.
Variables:
M% = Market Share targeted by the Entrant Firm
PE = Price Charged by Entrant Firm
PI = Final Price of Incumbent Firm
CE = Cost of the Entrant Firm
CI = Cost of the Incumbent Firm
WTPE = Willingness to Pay for Entrant Product
WTPI = Willingness to pay for Incumbent Product
K% = % of customers not buying any of the product
Assumption:
Total number of buyers = 100
K% = 0
PE = PI
Game Analysis
Case 1: CE = CI
Market Share = M%
Price Entrant = PE
= ( ) %
= (200 % 100) %
Maximizing Profit (Differentiating and equating to zero)
M% = 50%
PE = $ 150
= $2500
= ( ) %
= (200 % 120) %
Maximizing Profit (Differentiating and equating to zero)
M% = 40%
PE = $ 160
= $1600
= ( ) %
4
= 200 % 80 %
5
Maximizing Profit (Differentiating and equating to zero)
M% = 75%
PE = $ 140
= $4500
FINAL SUMMARY
Profit for both incumbent and the entrant firms are listed in the table below
COST WILLINGNESS TO PAY PRICE CHARGED MARKET SHARE PROFIT PROFIT OF INCUMBENT
CHARGING PE &
ENTRANT INCUMBENT ENTRANT INCUMBENT ENTRANT INCUMBENT ENTRANT INCUMBENT ENTRANT INCUMBENT TARGETING 100% Market
CASE 1 $ 100.00 $ 100.00 $ 200.00 $ 200.00 $ 150.00 $ 200.00 50% 50% $ 2,500.00 $ 5,000.00 $ 5,000.00
CASE 2 $ 120.00 $ 100.00 $ 160.00 $ 200.00 $ 160.00 $ 200.00 40% 60% $ 1,600.00 $ 6,000.00 $ 6,000.00
CASE 3 $ 80.00 $ 120.00 $ 200.00 $ 200.00 $ 140.00 $ 200.00 75% 25% $ 4,500.00 $ 2,000.00 $ 2,000.00