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Suppose Firm 2 finds itsself at the upper node in this game. By choosing to Expand it earns a payoff of 7 whereas if it decided to Stay Out it would only earn a payoff of 4, so if Firm 1
Expands Firm 2 will also
Expand.
If Firm 2 is at the lower node it will also choose to Expand and earn a payoff of 12 rather than
Stay Out and earn a payoff of 8.
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