Question

Problem 5

We not

ed that one advantage for entrants is that incumbents who use uniform pricing might not

want to cut their price

everywhere

just to drive out an entrant in one market. How would this

consideration be impacted if the incumbent also produced some other produc

ts that were related

to the product that is the subject of the entry threat?

a.

Answer the question if the incumbent produces products that are

substitutes

for the product

that is the subject of the entry threat.

b.

Answer the question if the incumbent produces

products that are

complements

for the

product that it is the subject of the entry threat.

Problem 6

There are two firms. Each firm can decide to not enter the market (N), to enter the market with a

small factory (S) or to enter the firm with a large factory (L). Profits are as follows.

•

Any firm that does not enter earns a profit of 0.

•

A firm operating alone with a small factory earns a profit of 30.

•

A firm operating alone with a large factory earns a profit of 25.

•

If both firms enter with a small factory

, each earns a profit of 20.

•

If both firms enter with a large factory, each incurs a

loss

of 50.

•

If one firm has a small factory and the other has a large factory, the firm with the large

factory incurs a

loss

of 15 and the firm with the small factory incurs a

loss

of 10.

a.

Suppose the firms make their choices simultaneously. Draw the game matrix and determine

the type of factories that firms will build in the Nash Equilibrium.

b.

Suppose the firms make their choices sequentially

– Firm 1 chooses first, and then

Firm 2

observes Firm 1’s choice and makes its own decision. Draw the game tree and determine

the type of factories that firms will build in the subgame perfect equilibrium.

c.

What action would Firm 1 take

if it knew up front that Firm 2 is going to stay out?

d.

How can you explain the contrast between your answers in (b) and (c)

Answer 1

Answer 5)

The consideration that the new entrants have an advantage to move in the market where the incumbents doesn't necessarily reduce the prices so as to block the competition and charges uniform prices everywhere will get affected by a large margin in case it produces products which are close

substitutes: are those goods which can be used in place of one another, such as coke and pepsi. The existing firm in the industry will take steps to discourage new entrants from entering the market by involving in various activities such as lowering the price and thus capturing a huge market share which will discourage the new entrants from entering the market or if the company enjoys strong brand loyalty and other offers which makes the consumers loyal to it.Once the company achieves its objective and drives away competition, it can simply raise the prices again and enjoy supernormal profits.

complimentary: they are goods who depends upon one another. When two goods are complimentary,they experience joint demand example car and petrol.If there is an increase in the price of one good,the demand for another falls.

So, here an incumbent may actually be supportive and let new entrants setup their business freely and will not try to create any barriers to entry because the sale of their products depends upon the sale of the new entrants and their success.