Determine the critical value of the fixed cost F-bar

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Reference no: EM131196125

An incumbent monopoly with constant marginal cost k operates in a market with demand schedule p = a-Q, where p is the price, Q is the quantity demanded and a > k is a positive parameter. A second rm (with the same constant marginal cost k) wishes to compete for demand, but faces a fixed cost F to enter the market. In order to deter entry, the incumbent decides to precommit to producing a certain capacity G, thus incurring a sunk cost kG which cannot be recovered.

Determine the critical value of the fixed cost F-bar where the optimal strategy for the incumbent is to deter when F > F-bar and to accommodate when F.

Reference no: EM131196125

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