Question

Suppose that Samsung is considering entering the U.S. market for deep freezers. Samsung’s cost function for selling freezers in the U.S. is: Cs(qs) = 10qs + 0.025q 2 s This implies that their marginal cost is: MCs(qs) = 10 + 0.05qs. Suppose the U.S. market is monopolized by G.E. G.E.’s cost function is lower than Samsung’s due to reduced shipping. It is: CGE(qGE) = 0.025q 2 GE Suppose the demand for freezers is given by: P(Q) = 55 − 0.1Q. (a) Suppose GE is currently producing the monopoly level of freezers. How many freezers do they sell and what price do they sell at? (b) Could Samsung profitably enter the U.S. market? (c) How many freezers would GE have to produce so that Samsung would not want to enter the market? You need to find Samsung’s best response function and compute what quantity of freezers GE would need to make so that when Samsung plays its best response it makes zero profits. (d) Suppose Samsung and GE compete a la Cournot if Samsung enters the U.S. market. What would profits be? Would GE be better off committing to deter entry as in the previous part of this question or by accomodating entry and earning Cournot duopoly profits?

Answer 1

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