Answer to Question #254692 in Microeconomics for Anuj

Question

Jal is a small water company that is considering entering a market dominated by Bisleri. Each company’s profit depends upon whether Jal enters or not, and whether Bisleri sets a low price or a high price. Bisleri’s strategy Jal’s strategy High Price Low Price Enter $2 million, $3 million Loss ($1 million), $1 million Not enter 0, $7 million 0, $2 million Bisleri issues a statement to Jal by saying, “If you enter, we will set a low price, so you better decide to stay out”. Do you think Jal should believe the threat? What do you think Jal should do?

Answer 1

Jal should not believe the threat. They should enter the market.