For each of the games illustrated in Exercise S2, identify the rollback equilibrium outcome and the.

For each of the games illustrated in Exercise S2,
identify the rollback equilibrium outcome and the complete equilibrium strategy
for each player.

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Consider the rivalry between Airbus and Boeing to develop
a new commercial jet aircraft. Suppose Boeing is ahead in the development
process and Airbus is considering whether to enter the competition. If Airbus
stays out, it earns 0 profit, whereas Boeing enjoys a monopoly and earns a
profit of $1 billion. If Airbus decides to enter and develop the rival
airplane, then Boeing has to decide whether to accommodate Airbus peaceably or
to wage a price war. In the event of peaceful competition, each firm will make
a profit of $300 million. If there is a price war, each will lose $100 million
because the prices of airplanes will fall so low that neither firm will be able
to recoup its development costs. Draw the tree for this game. Find the rollback
equilibrium and describe the firms’ equilibrium strategies.

 

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