November 7, 2001
ELABORATION ON THE EXPLANATION OF ENTRY DETERRENCE V
p. 149 error, line 4 (Martin Caley, Isle of Man Treasury). Delete
``$+0.05[40]".
My explanation here is bad, so I will elaborate on it here. Figure
6.3 is abbreviated, and contains within it the game in Figure 6.1. The
(-10,300) and (- 10, 0) payoffs indicate what happens if the
incumbent chooses FIGHT depending on whether the entrant is weak
(300) or strong (0). In either case, the entrant gets -10 when the
incumbent chooses FIGHT.
If, however, the incumbent chooses COLLUDE, then the entrant gets a
payoff of 40, from Figure 6.1.
Suppose the entrant is strong and Nature told the incumbent that.
But suppose the entrant does not know whether Nature told the
incumbent. Nature did tell the incumbent with probability .1, and if
the entrant then enters, the incumbent will collude and the
entrant's payoff will be 40. Nature was silent with probability .9,
and if the entrant then enters, the incumbent will fight and the
entrant's payoff will be -10. The expected payoff is thus -5 (=
.1[40] + .9 [-10]).