Two companies are playing an entry game. In the first stage of the game the incumbent firm decides whether to invest in new robotic equipment, which will lower its marginal cost of production. In the...

Extracted text: Two companies are playing an entry game. In the first stage of the game the incumbent firm decides whether to invest in new robotic equipment, which will lower its marginal cost of production. In the second stage, a potential rival decides whether to enter the market. o If the incumbent firm chooses to invest and the rival firm does not enter the market, the incumbent makes 8 million in profits. o If the incumbent firm chooses to invest and the rival firm enters the market, the incumbent makes 2 million in profits, and the rival firm looses 1 million. o If the incumbent firm chooses NOT to invest and the rival firm does not enter the market, the incumbent makes 10 million in profits. o If the incumbent firm chooses NOT to invest and the rival firm enters the market, both the incumbent firm and the rival firm make 4 million each. (a) Draw a decision tree for this game. (b) Use backward induction to solve the game. What is the rival best strategy? What is the incumbent best strategy? (C) Please comment on the solution to this game. Mainly the fact that the investment does not seem to pay unless there is a threat of entry. Can you think of a reason why this would be the case?