Problem 2 gives a standard sort of story on entry deterrence based on an action taken...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Problem 2 gives a standard sort of story on entry deterrence based on an action taken by the incumbent monopolist that makes her more aggressive postentry. There are many stories of this sort; for others, see Tirole (1988). 2. Consider an industry with an incumbent monopolist, who is currently producing, and a potential entrant, who might or might not choose to enter. There is a range of possible production technologies for producing this good, which differ in the level of marginal and fixed costs. Each technol- ogy is a constant marginal cost technology with marginal cost somewhere between 1 and 3 per unit. In the technology with marginal cost c (from the range from 1 to 3), fixed costs are 15-4c. That is, lower marginal costs bring with them higher fixed costs. Any firm in this industry may choose whatever technology it wishes to employ, but it can make this choice once only. The choice of technology of any firm is known to all potential and actual competitors. We imagine that there are two periods of production. In each, demand is given by D(P) = 9 - P. In the first period, the incumbent monopolist is definitely a monopolist. The monopolist begins this period by select- ing her production technology and then producing. In the second period, the entrant decides whether to enter at all. If he does enter, he picks his production technology. And then the two compete Cournot-style, si- multaneously picking quantities. If he does not enter, then the monopolist retains her monopoly and picks the quantity she wishes to sell. We assume that the entrant will enter only if he believes he will make positive profits, and the incumbent monopolist acts in a way that maximizes her sum of profits in the two periods. (Adding a discount factor only complicates the arithmetic.) (a) Suppose there was no threat of entry. What technology would the monopolist select? (b) Suppose the monopolist selects the technology you got as the answer to part (a). Will the entrant enter? If so, with which technology? (c) If the monopolist, in the first period, picks a technology that discourages the entrant from entering in the second period, we say that the monopolist has blockaded entry. Is there a technology the monopolist could pick in the first period that would blockade entry? If so, what range of technologies accomplishes this? (d) Given the threat of entry, what is the optimal course of action for the monopolist? How does the entrant respond to this? (What solution concept are you using?) Problem 2 gives a standard sort of story on entry deterrence based on an action taken by the incumbent monopolist that makes her more aggressive postentry. There are many stories of this sort; for others, see Tirole (1988). 2. Consider an industry with an incumbent monopolist, who is currently producing, and a potential entrant, who might or might not choose to enter. There is a range of possible production technologies for producing this good, which differ in the level of marginal and fixed costs. Each technol- ogy is a constant marginal cost technology with marginal cost somewhere between 1 and 3 per unit. In the technology with marginal cost c (from the range from 1 to 3), fixed costs are 15-4c. That is, lower marginal costs bring with them higher fixed costs. Any firm in this industry may choose whatever technology it wishes to employ, but it can make this choice once only. The choice of technology of any firm is known to all potential and actual competitors. We imagine that there are two periods of production. In each, demand is given by D(P) = 9 - P. In the first period, the incumbent monopolist is definitely a monopolist. The monopolist begins this period by select- ing her production technology and then producing. In the second period, the entrant decides whether to enter at all. If he does enter, he picks his production technology. And then the two compete Cournot-style, si- multaneously picking quantities. If he does not enter, then the monopolist retains her monopoly and picks the quantity she wishes to sell. We assume that the entrant will enter only if he believes he will make positive profits, and the incumbent monopolist acts in a way that maximizes her sum of profits in the two periods. (Adding a discount factor only complicates the arithmetic.) (a) Suppose there was no threat of entry. What technology would the monopolist select? (b) Suppose the monopolist selects the technology you got as the answer to part (a). Will the entrant enter? If so, with which technology? (c) If the monopolist, in the first period, picks a technology that discourages the entrant from entering in the second period, we say that the monopolist has blockaded entry. Is there a technology the monopolist could pick in the first period that would blockade entry? If so, what range of technologies accomplishes this? (d) Given the threat of entry, what is the optimal course of action for the monopolist? How does the entrant respond to this? (What solution concept are you using?)
Expert Answer:
Answer rating: 100% (QA)
a Without the threat of entry the monopolist would select the technology that minimizes her total co... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
1. How strong are the competitive forces confronting J. Crew in the market for specialty retail? Do a [Michael Porter] five-forces analysis to support your answer. (see chapter 3 in the textfor...
-
Demonstrate competency in the behavioral finance you are required to complete the following learning demonstration. 1. Executive summary 2) A numeric example demonstrating violations of expected...
-
On October 1, 2012, Jenkins Corporation bought bonds with a face value of $200,000 for $199,175, which included accrued interest. The bonds are due December 31, 2014, and carry a face rate of...
-
How can leaders effectively integrate ethical principles into their strategic decision-making processes to ensure that organizational objectives are pursued in a manner consistent with moral and...
-
What document must the defendant file if the defendant wants to remove an action to federal court?
-
Glen and Diane Flood owned and operated Floods Auto Parts and Glenwood Wrecker Service in Chatsworth, Georgia. The companies offerings to the local market included the sale of wholesale and retail...
-
please answer fast Problem 3 (4 points) For the utility function u(x) = (1+0.1xe-2x), determine the following for the lottery (0.7, 0.3, 0.1). (i) Expected consequence (a) (ii) Certainty equivalent...
-
What organizational capabilities are required to support the launch of "Command Products"?
-
Tradewind Aviation, which provides round trip flights from Teterboro airport in NJ to Martha's Vineyard and Nantucket, in Mass., recently hired a new accountant. The accountant's first task was to...
-
1. Sam saw his good friend Nick at the bar on a Friday night. Nick was so drunk, that he did not know the nature and consequences of his actions. While they were at the bar, Nick signed a contract...
-
Complete the statement of sources and uses of cash from the following entries: Net income Dividends Additions to inventory $ 2,900 800 260 Additions to receivables 290 Depreciation 230 Reduction in...
-
The Lewis Law Firm is a small legal practice that provides family law services. Lewis uses a normal cost accounting system to track service costs to the income statement, and has the following...
-
X Corp. adopts a plan of complete liquidation. It distributes land held as an investment to its shareholders that has a fair market value of $300,000 and an adjusted basis of $200,000. If the land is...
-
Alexei is a permanent resident (PR) who was convicted of armed robbery. He obtained PR via family sponsorship at a young age. Removal order 36(1)(a) was issued by the ID. There is a removal order...
-
Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to...
-
1-Stern observed all of the following results EXCEPT _______ in his experiment. A-one of the recombinant phenotypes was associated with an X chromosome of normal length B-the number of car, B+ male...
-
When Sven graduated from college and got a job, his income rose from $15,000 to $60,000. His consumption habits also changed drastically. Use the following information to determine his income...
-
When can backward induction be used to arrive at the equilibrium for a game?
-
Explain the income and substitution effects of an increase in the price of one good on an individuals consumption choice.
-
Explain the difference between the Expenses tab and the Items tab in the Write Checks window.
-
How should you account for advanced deposits received on customer orders?
-
Are time sheets required for QuickBooks Accountant to process payroll?
Study smarter with the SolutionInn App