Consider a market with an incumbent, firm
1. facing the entry of a rival, (48 2 firm
2. Firm 1 can make an investment K₁ (ε) = (4ε/3)^2 to accommodate the entry of = firm 2. The inverse demand in this market is p(Q) = 16-Q where Q = q1 + q2. Firms produce a homogeneous good and are Cournot competitors. Firm 1's cost function is c1 (q1,ε) = (4- ε)q1+(4ε/3)^2 and firm 2's cost is c₂ (q2) = 4q2
Determine q1 as a function of & at the equilibrium of the second-stage, which you can denote qi(ε).
