Entry Deterrence and Exclusive Dealing. Notes in the beginning slide. Question on the last slide.

c) (10 marks). Illustrate the profit and welfare consequences of exclusive dealing. by solving the "Exclusive Dealing and Economies of Scale" model done in class for the parameter values indicated below. Exclusive Dealing and Economies of Scale N buyers, Buyer demand: q = a - p, AC falls for Q S Q*, AC = c, Q > Q* Parameter Values: N = 125, a = 12, c = 4, Q* = 200Exclusive Dealing and Uncertain Entry example Buyer WTP = v, Incumbent cost = c, Entrant cost Ce = CH Or CL Probability of low-cost entrant = Prob Parameters: v = 10, c = 5, CH = 4, cz = 2, Probz = 1/2 Entry and pricing assumptions. If entry occurs firms engage in Bertrand competition (Price matching favours entrant). Entrant enter provided they at least break even.Fall 2022 No contract If entry does not occur then the incumbent sets PI = v =10 (Monopoly pricing) If entry does occur then the entrant charges Pe = c =5 (Bertrand competition) Probability of entry z is given by z = Prob(Ce P - CL = 3 then z = 0 and ni = 0 Conclusion: Profit maximizing contract: P = 5, s = 3Fall 2022 Comparison No contract Contract Probability z = Prob(Ce 0 Profit Entrant's The = Z(C - EC.) The = Z(P - s - EC.) Expected The = 1(5 -3) = 2 The = 0.5(2 - 2) = 0 Profit Expected CS =V-ZC - (1 - z)V CS = V -P Consumer CS = 5 CS = 5 Surplus Expected W = v-Z(ECe) - (1 - z)c W = v-Z(ECe) - (1 -z)c Welfare W =7 W =6.5