Final answer:
The first mover in a sequential game may discourage the second mover but does not always earn a greater payoff, nor does the initial move guarantee a Nash equilibrium. Over time, competition can drive economic profits to zero unless firms act like a cartel, operating collectively to maintain higher profits, which is also not a guaranteed outcome.
Step-by-step explanation:
In a sequential game, the first mover into a new market doesn't always earn a greater payoff than the second mover. However, the first mover may discourage the second mover from entering the market by capturing a significant market share and possibly erecting barriers to entry. In fact, firms often enter markets only when they perceive a dominant strategy that will give them a competitive edge. Nevertheless, the presence of a first mover does not guarantee that a Nash equilibrium will result, especially if the sequential game continues to evolve over time with moves and counter-moves by competing firms. In the long run, as firms enter and compete for economic profits, the market may reach an equilibrium where all firms earn zero economic profits due to the entry of new competitors and resulting competitive pressures.In the given scenario on Main Street, if Firm A (Amy) and Firm B (Joe) are in a monopolistically competitive market and Firm A moves next to Firm B, they will likely continue maneuvering until they find a balance, potentially each capturing half of the market share. However, if Firm A is earning positive economic profits, this may attract more competitors to the market, which in turn can decrease demand for Firm A's product, lower the profit-maximizing price, and reduce the profit-maximizing level of output. Ultimately, if the businesses form a cartel, they may act collectively like a monopoly and potentially earn economic profits, although this is not a guaranteed or stable outcome.