Market for hand sanitizer is controlled by a monopoly

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The U.S. market for hand sanitizer is controlled by a monopoly (firm I, for incumbent) that has a total cost given by TC(qi) = 0.025qi^2. The market demand for hand sanitizer is given by P = 50 – 0.1Q. Under monopoly, Q = Qi. Now let there be a foreign firm (firm E, for entrant) that is considering entry into the market. Because the entrant must ship hand sanitizer all the way across the ocean, its costs are higher. Specifically, the entrant’s costs are given by TC(qe) = 10qe + 0.025qe^2.

Question: Show that the monopolist would need to commit to produce 400 units in order to deter entry of the foreign firm. (Hint: figure out the monopolist’s output level q* such that the entrant loses money if it exports anything other than zero.) What are the incumbent’s profits if it commits to this output level and deters entry?

Reference no: EM13888416

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