Consider an industry with inverse demand P = 32 − 4Q. The industry has an incumbent...

Consider an industry with inverse demand P = 32 − 4Q. The industry has an incumbent firm (i) and a potential entrant (e). Each firm has a marginal cost of 0. The entrant pays a fixed cost of 9 only if it enters the industry. Assume it enters the industry only if its profits are greater than 0.

(a) What is the incumbent’s output as a monopoly without threat of entry?

(b) What is the incumbent’s output and profit with competition from the entrant assuming the incumbent moves first and the firms compete a la Stackelberg?

(c) What quantity must the incumbent produce to deter entry? (Hint: you must find the entrant’s profit for any value of qi .) Does the incumbent accommodate, deter, or blockade entry? Show your work and explain briefly.

Expert Solution

Rahul Sunny answered 7 months ago

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