What is the optimal strategy for the monopolist

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Consider the following information regarding a monopolist Price = $20 / unit Sales = 200,000 units Fixed Costs = $1000000 Variable Costs = $5 / unit The monopolist uses a ten year planning horizon and a discount rate of 7%. If a new firm enters the market today, the monopolist will have to permanently reduce the price to $16/unit to retain its sales. The monopolist believes that the new entry can be prevented if the price were reduced to $12/unit immediately and for the next three years (0-3), after which the price can be brought back to the original level for the remaining years (4-10). This price reduction would also increase sales to 220,000 units during the relevant years. a) Make the decision tree. b) What is the optimal strategy for the monopolist?

Reference no: EM13141846

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