A firm entering a market and can position its product to either serve a small market...

 

Transcribed Image Text:

A firm entering a market and can position its product to either serve a small market segment or a large market segment. If the entrant chooses a small market segment then (i) the entrant will have fewer buyers and the incumbent will have more buyers for any given set of prices and (ii) buyers will be less sensitive to price differences between the two firms, as compared with the case in which the entrant chooses a large market segment. If the firms engage in Differentiated Bertrand competition, then explain the direct and the strategic effects of the entrant choosing a small market instead of a large market segment strategy. b) (10 marks). Illustrate your answer in part a) by solving for the Differentiated Bertrand equilibrium levels of price, output and profits for the demand and cost functions indicated below, for both small market and large market segment strategies. Indicate which strategy is more profitable for the entrant (firm 1). Firm 1 serves large market segment: Firm 1 serves small market segment: MC =MC2=24 9160 (P1 P2), 92 60 (P2 P) 9 = 48 -0.5 (p-P2)-92 = 72 -0.5(p2 - P) A firm entering a market and can position its product to either serve a small market segment or a large market segment. If the entrant chooses a small market segment then (i) the entrant will have fewer buyers and the incumbent will have more buyers for any given set of prices and (ii) buyers will be less sensitive to price differences between the two firms, as compared with the case in which the entrant chooses a large market segment. If the firms engage in Differentiated Bertrand competition, then explain the direct and the strategic effects of the entrant choosing a small market instead of a large market segment strategy. b) (10 marks). Illustrate your answer in part a) by solving for the Differentiated Bertrand equilibrium levels of price, output and profits for the demand and cost functions indicated below, for both small market and large market segment strategies. Indicate which strategy is more profitable for the entrant (firm 1). Firm 1 serves large market segment: Firm 1 serves small market segment: MC =MC2=24 9160 (P1 P2), 92 60 (P2 P) 9 = 48 -0.5 (p-P2)-92 = 72 -0.5(p2 - P)

Answer rating: 100% (QA)

a Direct effect By choosing a small market segment the entrant will have fewer buyers compared to th... View the full answer