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The market for taxi services in a Midwestern town is monopolized by Firm 1

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The market for taxi services in a Midwestern town is monopolized by Firm 1. Currently, any taxiservices firm must purchase a $40,000 “medallion” from the city in order to offer its services. Apotential entrant (Firm 2) is considering entering the market. Since entry would adversely affectFirm 1’s profits, the owner of Firm 1 is planning to call her friend (the mayor) to request that thecity change the medallion fee by $F thousand. The extensive form representation of the relevantissues is summarized in the accompanying graph (all payoffs are in thousands of dollars andinclude the current medallion fee of $40,000). Notice that when F > 0, the medallion fee isincreased and profits decline; when F

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