Question - Firm Y is considering whether to enter a market that is dominated by Firm Z. If it doesn't enter, it expects to earn $10m, as it did last year, and Firm Z will earn $25m. If Firm Y does enter the market, its profits depend on whether Firm Z responds by either charging a high price or a low price. The estimated payoffs if Firm Y enters are:
If Firm Z responds by charging a high price, Firm Y loses $5 and Firm Z earns $15. If Firm Z responds by charging a low price, Firm Y earns $15 and Firm Z earns $20.
Represent the strategic interactions between Firm Y and Firm Z in a game tree (i.e. in extensive form). Should Firm Y enter the market?