Suppose that inverse market demand is given by p(Q) = 100 − 10Q, where Q is the total quantity supplied. There is an incumbent monopolist that produces at a marginal cost of c_I = 30 and does not have fixed costs. There is also a more efficient potential entrant that considers entering the market and competing with the monopolist. The entrant has a marginal cost of c_E = 20, but has to pay a fixed costs F_E = 50 to enter the market. Assume perfect information.

a) What is the profit for the incumbent and the entrant in the case where (i) the entrant stays out and (ii) the entrant enters and the firms compete?

b) Suppose that the incumbent tries to discourage the entrant from joining by announcing that it would triple its production relative to the competitive level if the entrant were to enter. What will be the profits in that case?

c) Why is this announcement not credible?

d) Suppose now that the incumbent has branches that is active in 20 different geographical markets, all of which are monopolised. Discuss how intuitively this may help the monopolist to keep entrants out, but theoretically it does not given the current model set-up.

e) Discuss how this story may change if the incumbent is a much more efficient firm than the entrant (e.g. c_I = 0). Is this a competition concern and why?

f) Discuss how the incumbent may use uncertainty about its marginal cost to predate on the entrant. Is this a competition concern and why?

Answer rating: 100% (QA)

a The inverse demand function is given as PQ10010Q where P and Q represent the price and quantity of the concerned good or product in this case The marginal cost of the incumbent monopolist is given a... View the full answer