Question

Consider a market with a monopolist and a firm that is considering entry. The new
firm knows that if the monopolist “fights” (i.e., set a low price after the entrant comes
in), the new firm will lose money. If the monopolist accommodates (continues to
charge a high price), the new firm will make a profit.

(a) Is the monopolist’s threat to charge a low price credible? That is, if the entrant has
come in, would it make sense for the monopolist to charge a low price? Explain.
(b) What is the Nash equilibrium of this game?
(c)How could the monopolist make the threat to fight credible?

Answer 1

Ans a).yes monopolist's threat to charge a low price credible because when new entrants come in to the market and thier price lower than the price of monopolist firm than definately consumer can rush towards new firm and monopolist can loose its consumer therefore to be in a competition it is necessary for monopolist to reduce its price.If monopolist does not charge low price or being rigid that it will act as a opportunity for new firm to fascinate consumer with lower price and gain consumer share.

Ans.b) Nash equilibrium of this game is monopolist firm has to choose between weather to adopt new strategy or does not adopt new strategy.Its dilemma is to choose that stratgey that does not loose its profit simultaneously does not loose its customer due to entrants of new firm .Both firm has to adopt that strategy that being competitive does not loose market share.

Ans c) Monopoly can make threat to fight credible while lowering the price after entrants new firm because if monopolist will not reduce its price than its threats will become credible and it can loose its profit followed by lose of consumer therefore it  is necessary after visualise a threat in the market of new entrants monopolist must reduce its price so that consumer does not move to new entrant firm.