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The Complete Idiot's Guide to Game Theory by Edward Rosenthal, Ph.D., Edward C. Rosenthal

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Breaking Through the Fog

In Chapter 4 I introduced the Market Entry game, featuring an Upstart deciding whether to enter a market dominated by a Goliath. One way to represent the game is to use the normal form, which employs the same matrix used in Chapter 4.
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Upstart vs. Goliath represented in normal form.
Remember, the subgame perfect equilibrium strategy is for Upstart to enter and for Goliath to accommodate. The other (Nash) equilibrium is for Upstart to stay out while Goliath played hardball. This equilibrium, however, which might result from Goliath’s threat to play hardball, is not credible. Upstart will realize that the only rational ...

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