Case

2 Fases Fase 1: Will E1 enter the market' E1 enters reaction * Accomodate: I: 50 mio $, E1: 10 mio $ * Fight: I: -40 mio, E1: -40 mio E1 does not enter the markte I has a monopoly in the European market: I: 500 mio Fase 2: Will E2 enter the market' E2 enters the market reaction: independent of the results from the European market * Accomodate: I: 50 mio, E1: 10 mio * Fight: I: -40 mio, E1: -40 mio E2 does not enter the market I has a monopoly in the American market : I: 500 mio 4. Further explanation of the scheme. The benefit of the Incumbent in each situation. Monopoly in both markets: 1,000 = 500 + 500 Monopoly in the first market, accommodate in the second one:550= 500 + 50 Monopoly in the First market, fight in the second one: 460 = 500 - 40 Both markets accommodate: 100 = 50 + 50 Accommodate in the First market, fight in the second one: 10 = 50 - 40 Both markets fight: -80 = -40 – 40 Benefit for E1 and E2 in each situation: Accommodate: 10 No enter: 0 Fight: - 40 We can conclude that E2 as -> and E1 as well will enter the market. If we use the technique of backward induction, we can see this easily considering that both parties will react on a rational basis. If E2 enters the market than the Incumbent can only maximalise -> maximise his profit by using an accommodate strategy. The benefit for the Incumbent will than be 50 million $. On the other hand, if the Incumbent had used the fight strategy, the Incumbent would have had a loss of -40 million $. Knowing that the Incumbent will use the accommodate strategy, E2 will enter the market while this decision leads to a benefit of 10 million $.