t this entry (which as we see would be costly to both), or acquiesce and arrive at some peaceful co-existence (which is obviously more profitable). The best thing for incumbent is for entry not to take place at all. There are in fact two Nash equilibria: (IN;ACQUIESCE) and (OUT;FIGHT). But the last mentioned (OUT;FIGHT) is implausible, as if the incumbent were faced with the fact of entry, it would more profitable for him to acquiesce rather than to fight the entry. Due to this fact the potential entrant would choose to enter the industry and the only equilibrium would be (IN;ACQUIESCE). Thus we can conclude, that in this case the incumbent's threat to fight was empty threat that wouldn't be believed, i.e. that threat was not a credible one. The concept of perfect equilibrium, developed by Selten (1965;1975), requires that the "strategies chosen by the players be a Nash equilibrium, not only in the game as a whole, but also in every subgame of the game". (In our model on the picture, the subgame starts with the word "incumbent"). We have got the perfect equilibrium to rule out the undesirable one.4. Repeated games approach. a.) Concept. As I have already mentioned, in practice firms are likely to interact repeatedly. Such factors as technological know-how, durable investments and entry barriers promote long-run interactions among a relatively stable set of firms, and this is especially true for the industries with only a few firms. With repeated interaction every firm must take into account not only the possible increase in current profits, but also the possibility of a price war and long-run losses when deciding whether to undercut a given price directly or by increasing its output level. Once the instability of collusion has been formulated in the "one-shot" prisoners dilemma game, it raises the question of whether there is any way to play the game in order to ensure a different, and perhaps more realistic, outcome. Firms do in prac...
