Assume that there is a two-period market with 100 identical customers who demand one unit of...

Assume that there is a two-period market with 100 identical customers who demand one unit of the good per period. Each is willing to pay up to a maximum price of $10. In the first time period there is one firm that acts as a monopolist and has a constant marginal cost equal to 5. In the second period the incumbent faces the possible entry of another firm. The potential entrant’s marginal cost is unknown to the incumbent firm. However, the incumbent assumes that the marginal cost is a random variable distributed uniformly between 0 and $10 with an expected value of $5. Assume that the incumbent offers its customers the following contract: pay a price of $10 in the first period and $7 in the second period. However, customers who switch to the entrant in time period 2 must pay a fee to the incumbent equal to $4.

Will customers accept such a contract if offered? Is the contract profitable to the incumbent? What effect does the contract have on the expected profit of the potential entrant and the probability of entry? Be sure to explain your reasoning for each answer.

Solutions

Expert Solution

In case of the customers agreeing to the contract offered by the incumbent firm, they will pay $10 in the first period and $7 in the second period. The customers are willing to pay up to $10 for the product so they would accept the contract.
The contract is profitable to the incumbent firm as the price the customers are paying in both the time period is above the marginal cost of the firm.
Such a contract will affect the profitability of the new firm. In the first period, there is only one firm, so the customers will purchase the product from the incumbent firm and accept the contract that is being offered by the incumbent firm.

The price at which the incumbent firm is offering to the customers in the second period is $7 and if the customers switch to the new entrant in the second period they have to pay a fee to the incumbent that is equal to $4.

So the new entrant has to sell the product at $3 or less to attract the customers of the incumbent firm. The new entrant will enter the market only if its marginal cost is below $3.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Assume a two-time-period model for a depletable resource, with identical demand functions in each of the...

Assume a two-time-period model for a depletable resource, with identical demand functions in each of the tow time periods (i.e. P = 10 - 0.5q). The marginal cost of extraction is also constant for each of the two time periods (i.e. MC = $3). Calculate the dynamically efficient allocations of the depletable resource across the two time period when: (i) there are 20 units of the resouce available for use in total, and (ii) there are 30 units available. Also...

Assume a firm faces two customers in the market. Customer 1 has an inverse demand of...

Assume a firm faces two customers in the market. Customer 1 has an inverse demand of p=100−q1, and Customer 2 has an inverse demand of p=180−q2. Marginal cost per unit is constant and equal to $50. Determine the profit the firm could make if it could charge each customer a different access fee. When charging different access fees to both customers, profit equals ______ (Enter a numeric response using a real number rounded to two decimal places.) Assume the profit-maximizing...

a.) Two identical firms compete as a Cournot duopoly. The market demand is P=100-2Q, where Q...

a.) Two identical firms compete as a Cournot duopoly. The market demand is P=100-2Q, where Q stands for the combined output of the two firms, Q=q1 +q2. The marginal cost for each firm is 4. Derive the best-response functions for these firms expressing what q1 and q2 should be. b.) Continuing from the previous question, identify the price and quantity that will prevail in the Cournot duopoly market c.) Now suppose two identical firms compete as a Bertrand duopoly. The...

Suppose there are two identical firms A and B facing a market demand P=100-2Q. Both firms...

Suppose there are two identical firms A and B facing a market demand P=100-2Q. Both firms have the same marginal cost MC=4. Assume that firms are Cournot-competitors (in quantity). Find the equilibrium price, quantity and profits. Assume that firms are Stackelberg-competitors (in quantity) and Firm A is the leading firm. Find the equilibrium price, quantity and profits. What general conclusions can you derive from the answers that you found in (a) & (b)?

Assume there is a duopoly. Assume that the market demand is : P=100-2Q Assume the good...

Assume there is a duopoly. Assume that the market demand is : P=100-2Q Assume the good can be produced at a constant marginal cost of 0 and that both firms have the same cost. Assume the firms act like Cournot firms. 1. What is the equation for firm 1’s demand curve? 2. What it the equation for firm 2’s demand curve? 3. What is the equation for firm 1’s reaction function? 4. What is the equation for firm 2’s reaction...

6. Assume an industry with two firms facing an inverse market demand of P = 100...

6. Assume an industry with two firms facing an inverse market demand of P = 100 - Q. The product is homogeneous, and each firm has a cost function of 600 + 10q + 0.25q2. Assume firms agree to equally share the market. a. Derive each firm’s demand curve. b. Find each firm’s preferred price when it faces the demand curve in part a. Now assume that firm 1’s cost function is instead 25q + 0.5q2 while firm 2’s is...

Assume a stock market with only two assets: one risky, one risk-free. Assume two investors who...

Assume a stock market with only two assets: one risky, one risk-free. Assume two investors who are identical, except for their degree of risk aversion. (Same wealth, same investment horizon, etc.) Investor A has a degree of risk aversion of 1.5, while investor B has a degree of risk aversion of 5. Describe how their investment portfolio will differ

Assume a stock market with only two assests: one risky, one risk-free. Assume two investors who...

Assume a stock market with only two assests: one risky, one risk-free. Assume two investors who are identical, except for their degree of risk aversion. (Same wealth, same investment horizon, etc.) Investor A has a degree of risk aversion of 1.5, while investor B has a degree of risk aversion of 5. Describe how their investment portfolio will differ?

Consider a market with two identical firms, Firm A and Firm B. The market demand is...

Consider a market with two identical firms, Firm A and Firm B. The market demand is ? = 20−1/2?, where ? = ?a +?b . The cost conditions are ??a = ??b = 16. a) Assume this market has a Stackelberg leader, Firm A. Solve for the quantity, price and profit for each firm. Explain your calculations. b) How does this compare to the Cournot-Nash equilibrium quantity, price and profit? Explain your calculations. c) Present the Stackelberg and Cournot equilibrium...

Two types of customers make up the market for Armoyas. There are 100 type A customers,...

Two types of customers make up the market for Armoyas. There are 100 type A customers, each of whom is willing to pay up to $10 for an Armoya. There are 50 type B customers, each willing to pay up to $8 for an Armoya. No customer wishes to buy more than a single Armoya. The monopolist cannot differentiate between the types of customer. The average and marginal cost of production is constant at $6/Armoya. a)What is the selling price...

Subjects