Answer
a) Yes, Big Brew's dominant strategy is to price high.
b) Little Kona should enter the market. The equilibrium is for Little Kona to enter the market and for Big Brew to price high.
c) No, the threat should not be believed.
d) They might agree to let Big Brew charge high prices and keep Little Kona out of the market (or maybe stay at the Nash equilibrium).
Work Step by Step
a) If Little Kona was to enter, Big Brew is better off pricing high (3 million dollars) than pricing low (1 million dollars). If Little Kona doesn't enter, Big Brew is better off pricing high (7 million dollars) than pricing low (2 million dollars). Big Brew's strategy is to price high.
b) Since Big Brew is pricing high, Little Kona is better off entering the market (2 million dollars) than not enter (0 dollars).
c) If Little Kona enters, Big Brew (pricing low) would earn 1 million dollars. However, if Big Brew prices high, they would earn 3 million dollars. (This is counter to the threat they just maid to Little Kona.)
d) If both firms were to collude and share profits, the Nash equilibrium might be chosen. However, if Little Kona were to get out of the coffee industry, Big Brew could pay Little Kona to stay out of the industry.
