Elucidate what is the minimal compensation t

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Reference no: EM1351678

Consider an incumbent rm that produces at constant marginal cost cI and a potential entrant that, after paying a xed cost to enter f, produces the same homogenous good at a cost cE. Suppose the entrant is more ecient, cE < cI : Demand is given by D(p) = ô€€€p with big enough.

1. In the case of no entry, nd the equilibrium price, pro t of the incumbent and the consumer surplus.

2. Compute the condition under which the entrant nds entry pro table (assume > 2cI + cE).

3. Under the conditions found above, if entry occurs compute the equilibrium price and the consumer surplus. Suppose that now, the incumbent can oer a compensation t to the buyer in order to accept and sign an exclusive contract.

4. Elucidate what is the minimal compensation t that induce the buyer to accept the exclusivity contract?

5. What is the maximal compensation that the monopolist is willing to oer to the buyer? Can the incumbent deter entry by oFFering an exclusive contract?

Reference no: EM1351678

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