QUESTION II (30 marks) You are the manager of a sports bar ‘Sweet Economies’ (SE), which has been monopolizing the West-Singapore market with…

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QUESTION II (30 marks)You are the manager of a sports bar ‘Sweet Economies’ (SE), which has been monopolizing theWest-Singapore market with good-tasting micro-brewery ale directly imported from Belgium. Oneday, you overhear customers say that an NUS MBA drop out is getting ready to open the same kind ofbar in the area, naming it ‘Economics Sucks’ (ES).SE is now in dilemma. After a long discussion with an economist Dr. Bosanova Jo, SE learns that itcould successfully deter the entry of ES if it takes a contingent strategic action in advance – i.e.before ES makes entry decisions – as below:SE could pay $X to a popular regional rock band ‘Economics Rocks ( ER)’ in advance toperform at SE if requested, which will surely attract more ale-drinkers. (SE may not want torequest ER to perform, in which case $X becomes irrevocable.)This $X can be interpreted as a commission to ER in exchange for the contract. ER will get paid partof which can be subtracted from the performance fee later if ER is requested to play in SE. (Whetherfollows:With the above possibility added, the sequential decisions to be made by the bars can be viewed asSE moves first and chooses whether to “Pay $X to ER’ as suggested by Dr. Jo to enhance itsfighting ability or ‘Do Nothing’.ES moves next and decides whether to ‘Enter’ the market or ‘Stay Out’.If ES stays out, then SE remains monopolist. But, if ES enters, then SE decides whether to”Accommodate’ its new rival (by not requesting ER to perform at SE) or ‘Fight’ ( by requestingER to perform at SE).The payoffs for each possible outcome are summarized as below, the payoffs (in thousands of dollars)being in the order of (SE’s payoff, ES’s payoff):(a) If SE did nothing in the first stage:(b) If SE pays $X to ER in the first stage:SE’s choicePayoffsPayoffsES’ Choice(SE’s, ES’)SE’s choiceES’ Choice(SE’s, ES’)FightEnter(-1, -1)FighEnter(3 , – 1)FightStay Out(8 , 0)FightStay Out(8 -X , 0)AccommodateEnter(5 ,5)AccommodateEnter(5-X , 5)AccommodateStay out(8, 0)AccommodateStay out(8 -X , 0)Answer the following questions.(1) (10 marks) Represent the game in an extensive form. (Make sure to specify who is moving ateach of the decision nodes with the right payoffs for each of the possible outcomes. )(2) (20 marks) For what range of X would SE be induced to take the above contingent strategicaction to successfully deter ES’ entry? Show your brief work.

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