This is an example of successful entry deterrence; the outcome, however, depends
upon two critical assumptions. First, the result depends on the numbers used in the payoff
matrix; had these been different the resultant equilibrium would have been different.
Second, perfect (or at least sufficient) knowledge is being assumed – the entrant and the
incumbent must both be aware of the pay-offs resulting from their behaviour. This is
clearly a simplification, information is incomplete and actors sometimes get it wrong;
the incumbent firm may react differently post-entry from the way the entrant expected.
However, it does illustrate the principle involved in entry deterring behaviour and the
use of game theory for evaluating the outcome of such behaviour.