Does the high-cost firm have an incentive to set a low price

Reference no: EM13200145

An incumbent firm operates in a local computer market, which is a natural monopoly. That is, there is room for only one firm to sell profitably in this market. Market demand for the good is estimated to be Q^D = 100-P. Another firm would like to enter this market, but only if the incumbent firm has a higher unit cost than it does. Specifically, there is a 25 percent chance that the incumbent is a low cost firm, with a unit cost equal to 20, and there is a 75 percent chance that the incumbent is a high-cost firm with a unit cost of 30. The entrant's unit cost is 25. The entrant knows its cost but not that of the incumbent. The incumbent does know its unit cost. Market demand is common knowledge to both firms. The entrant, however, does get to observe the current or pre-entry market price at which the incumbent sells its good. If the entrant decides to enter the market it incurs a set-up cost of $1,000. Does the high-cost firm have an incentive to set a low price in order to masquerade as a low-cost firm?

Reference no: EM13200145

Questions Cloud

What loan a competitive banking industry would accept : What would be the loan contract that a bank in a competitive banking industry would accept to loan Newvel worsens. Specifically there is a 50 percent chance of earning $200 million and a 50 percent chance of earnings only $40 million. Fixed costs ..

What is the productivity that during one week : Another worker (worker 2) produces at an average rate of 65 per day with a standard deviation of 21. What is the productivity that during one week (5 working days) worker 1 will produce more than worker 2?

Manager of a restaurant figures the cost of making coffee : The manager of a restaurant figures the cost of making coffee is m = 0.049x, where m is the cost of making x cups. Find the cost of making 600 cups of coffee.

Compute the payoff schedule for the call option : Compute the payoff schedule for the call option using the following stock prices, S, and draw a graph of the payoff schedule and Compute the payoff schedule for the call option using the following stock prices, S, and draw a graph of the payoff sched..

Does the high-cost firm have an incentive to set a low price : The incumbent does know its unit cost. Market demand is common knowledge to both firms. The entrant, however, does get to observe the current or pre-entry market price at which the incumbent sells its good.

What is the adjusted balance due at maturity : Maryam pays $3000 on the 30th day of a $7,000, 120-day, and 8% loan.

By how much does the money supply change : Assuming that people hold no currency, what happens to each of these values if the central bank changes the reserve requirement ratio to 3%, banks still want to hold the same percentage of excess reserves, and banks don't change their holdings of ..

State the intrinsic value and the speculative premium : State the intrinsic value and the speculative premium for the call and put options. Why is the speculative premium so small for each option - Use the Black-Scholes OPM to find C.

Find the maturity value mv for the loan : To buy a laptop, Susan receives a $2000 loan at a 6.5% annual interest rate on January 10. The loan is due May 15. The year is not a leap year. Round the answers to the nearest cent (nearest hundredths)

User Account

All Pages