4. Assume an industry with a cost function of c(y) = 40+2y and a demand of 100?y. Assume there is an entrant and an incumbent. Assume that the incumbent announces their price before the incumbent decides to enter the industry. What is the highest price (lowest quantity) that the incumbent can offer which keep the entrant outside the market? Finally assume that if the incumbent is forbidden to make an announcement, there will be entry and both firms will adopt average cost pricing conditional on accurately anticipating the quantity their rival produces. Does it maximize social surplus to ban early announcements of prices?

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Analyzing the impact of early price announcements on market entry and social surplus Part 1 Highest price to deter entry Entrants Perspective To enter ... View the full answer