Irrawaddynet wants to prevent Peoplenet from entering the market for high-priced, Fiber broadband service. Fiber broadband service provides better quality internet connection and uses less energy than any other internet services. Even though Fiber broadband service is more costly to manufacture than any other types, Irrawaddynet is nonetheless earning economic profit as the largest firm in the industry making Fiber broadband service for upscale consumers. The annual profits (in millions of dollars) for Irrawaddynet and Peoplenet are shown in the following payoff table for the pricing and entry decisions facing the two firms. Price is the monthly service fee for 100 Mbps.

		Irrawaddynet
		P = $85	P = $150
Peoplenet	Stay out	$0, $20	$0, $34
	Enter	-$5, $15	$17,$17

a. If Peoplenet enters the market, can Irrawaddynet deter Peoplenet from entering the market for Fiber broadband service by threatening to lower the price, to $85? Why or why not?

Suppose the CEO of Irrawaddynet decides to make an investment in infrastructure capacity expansion such as new uplink fiber routes, new metro fiber routes, and upgrade bandwidth capacity for the greater quality before Peoplenet makes its entry decision. The extra capacity by increasing bandwidth raises Irrawaddynet’s total costs of production but lowers its marginal costs of producing extra Fiber broadband service. The payoff table after this investment in extra production capacity is shown here:

		Irrawaddynet
		P = $85	P = $150
Peoplenet	Stay out	$0, $16	$0, $24
	Enter	-$6, $14	$12,$12

b. With the new payoff conditions, can Irrawaddynet deter Peoplenet from entering the profitable market for Fiber broadband service? Can you identify the truth about the investment in infrastructure capacity expansion in order for the strategic move to be successful? Explain.

c. Construct the sequential game tree when Irrawaddynet takes the first mover position by deciding whether to invest in infrastructure capacity expansion. Find the Nash equilibrium path by using the roll-back technique. How much profit does each firm earn? (Hint: the game tree will have three sequential decisions: Irrawaddynet makes the decision first whether to invest in infrastructure capacity expansion, Peoplenet makes the entry decision, and Irrawaddynet decides whether to lower the price.)

d. Many economists argue that “More research, development, and innovation can be seen in the oligopolistic market structure than in any other”. Do you agree with this argument? Explain.

e. Suppose that Irrawaddynet charges the monthly fees for Fiber broadband service (100 Mbps) $150 for Homes with businesspeople and $85 for Homes with students. The CEO of Irrawaddynet said that the difference in fees was because of the inequalities in incomes for businesspeople and students. Can you suggest any alternative reasons for this difference?

Answer rating: 100% (QA)

a If Peoplenet enters the market can Irrawaddynet deter Peoplenet from entering the market for Fiber broadband service by threatening to lower the price to 85 Why or why not No Irrawaddynet cannot det... View the full answer