dolution

Two firms, incumbent is Oldstar, the new firm is Nova. Oldstar is an established company, but Nova is a relatively unknown startup and it is one of two types: “strong” or “weak.”Nova knows its type. Oldstar only know that w is the probability that Nova is weak, and so 1-w is the probability that Nova is strong. Nova just entered the market. Oldstar can choose to retreat or to fight. In a fight, Oldstar can beat a weak Nova, but a strong Nova can beat Oldstar. The winner has the market all to itself If Oldstar has the market to itself, it makes a gross profit of 3, and if Nova has the market to itself it makes a gross profit of 4. The cost of a fight is-2 to both firms (It is assumed that Nova has no option but fight)