Assume Rolls Royce (supplier of aircraft turbines and materials) has created a new market segment for specialized turbine equipment. Suppose the inverse demand is given by P = 56 - 2Q and costs are given by TC = 20Q + 40.
A) Rolls Royce could announce an additional investment in fixed assets to deter entry in the next period. How much would the company have to invest (increase fixed cost) to make an entry for a potential competitor unprofitable? Provide a numerical value for FC.
B) Rolls Royce knows that the entrant has identical costs and creates identical value for the consumers of turbine equipment. Using game theory, explain whether market entry will occur.