Extensive games

A market is currently served by a single incumbent. A competitor is considering entering the market. The incumbent wants to remain alone in the market and thus wishes to deter the competitor from entering. If the competitor enters, the incumbent can start a price war or can act cooperatively. A price war is the worst outcome for both parties; cooperative behavior by the incumbent is best for the competitor, and for the incumbent is better than a price war but worse than the competitor’s staying out of the market. We can model this situation as a strategic game.