Barnacle Industries was awarded a patent over 15 years ago for a unique industrial- strength cleaner that removes barnacles and other particles from the hulls of ships. Thanks to its monopoly position, Barnacle has earned more than $ 160 million over the past decade. Its customers— spanning the gamut from cruise lines to freighters— use the product because it reduces their fuel bills. The annual (inverse) demand function for Barnacle’s product is given by P = 400 - .0005Q, and Barnacle’s cost function is given by C(Q) = 250Q. Thanks to subsidies stemming from an energy bill passed by Congress nearly two decades ago, Barnacle does not have any fixed costs: The federal government essentially pays for the plant and capital equipment required to make this energy-saving product. Absent this subsidy, Barnacle’s fixed costs would be about $ 4 million annually. Knowing that the company’s patent will soon expire, Marge, Barnacle’s manager, is concerned that entrants will qualify for the subsidy, enter the market, and produce a perfect substitute at an identical cost. With interest rates at 7 percent, Marge is considering a limit- pricing strategy. If you were Marge, what strategy would you pursue? Explain.
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