An existing firm offers to supply one unit of a good to a potential buyer by writing a contract in period 1 for delivery in period 2. The contract specifies a price of $210 and a breach of contract fee of $150. The buyer would be willing to pay $330 and the existing firm has a marginal cost of $120. A potential entrant firm has costs uniformly distributed and competes in Bertrand competition with the existing firm if entry occurs. It is known that the entrant’s costs are less than or equal to $240. How much extra profit would the entrant earn if there were no contracts in place between the existing firm and the buyer?

Answer rating: 100% (QA)

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