The Chain Store Game
A monopolist (Player A) has branches in 20 towns. He faces 20 potential competitors, one in each town, who will be able to choose IN or OUT. They do so in sequential order and one at a time. If a potential competitor chooses OUT, he receives a payoff of 1, while A receives a payoff of 5. If he chooses IN, he will receive a payoff of either 2 or 0, depending on the response of Player A to his action. Player A, in response to a choice of IN, must choose one of two pricing strategies, COOPERATIVE or AGGRESSIVE. If he chooses COOPERATIVE, both player A and the competitor receive a payoff of 2, and if A chooses AGGRESSIVE, each player receives a payoff of 0.
These outcomes lead to two theories for the game, the induction (game theoretically correct version) and the deterrence theory (weakly dominated theory):
Read more about this topic: Chainstore Paradox
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