That's what each of them can decide.

And notice based on our conversations before, this is a sequential game.

So that means that the potential entrant will observe the price

that the incumbent sets prior to making a determination

whether they're going to enter the market or not.

Now the payoffs are given over at the ends of these lines.

The first number is the amount of money the incumbent is going to make.

So for example, if the state of the market is good and

the incumbent sets a high price and

the potential entrant enters, the incumbent makes $3.

It's also true that if the demand conditions are good,

the incumbent sets a high price.

The entrant decides to enter.

The entrant will make $1.

That's how you read these different payoffs.

So in each case, you have a price and an entry, no entry combination and

that determines the payoffs of the individual players in this game.

Okay, so now let's think about strategy for these players.

Suppose it's a good state of the world, let's look at the payoffs for

the incumbent.

If we go over here, the payoffs for the incumbent are, if they set a high price,

their payoff is 3, if the entrant enters and

it is 10, if the entrant stays out.

On the other hand, if the state of the world is good and the incumbent sets a low

price, if the entrant enters, the incumbent will make $2,

and if the potential entrant stays out they'll make $9.

Now, why is this important?

It's important to look at these two numbers and these two numbers and

realize that in both cases.