Suppose there is only 1 consumer who has a demand of a product up to 1 unit per period. There are 2 periods. Her willingness to pay is $10 per unit. There are two firms, I and E. Firm I is the incumbent and is the only producer in the 1st period. Firm E is the potential entrant with 0 marginal cost but must incur an entry cost of $1 if entering this market. Firm I knows its marginal cost (c) but Firm E does not know for sure: it knows c is either 0 or 5. Without any further information/signal, Firm E believes the probability for either case is 50%. The timing of the game is the following: Firm I sets the price in the 1st period (p1); Firm E makes its entry decision; • • Were "not enter" chosen, Firm I will remain as a monopoly in the 2nd period and set the price at $10. Were "enter" chosen, the two firms engage in Bertrand competition in the 2nd period. Lastly, assume both firms have a discount factor of 0.8.
Suppose there is only 1 consumer who has a demand of a product up to 1 unit per period. There are 2 periods. Her willingness to pay is $10 per unit. There are two firms, I and E. Firm I is the incumbent and is the only producer in the 1st period. Firm E is the potential entrant with 0 marginal cost but must incur an entry cost of $1 if entering this market. Firm I knows its marginal cost (c) but Firm E does not know for sure: it knows c is either 0 or 5. Without any further information/signal, Firm E believes the probability for either case is 50%. The timing of the game is the following: Firm I sets the price in the 1st period (p1); Firm E makes its entry decision; • • Were "not enter" chosen, Firm I will remain as a monopoly in the 2nd period and set the price at $10. Were "enter" chosen, the two firms engage in Bertrand competition in the 2nd period. Lastly, assume both firms have a discount factor of 0.8.
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Question
![2. [This question regards a business practice called "limiting pricing" where the
incumbent use price as the instrument to deter entry. Although we didn't spend
much time on this topic in class, you’ll find the issues illustrated here are closely
1
related to "advertising as a signal" (Ch. 13) and of course “entry deterrence"
(Ch 15).]
Suppose there is only 1 consumer who has a demand of a product up to 1 unit per
period. There are 2 periods. Her willingness to pay is $10 per unit.
There are two firms, I and E. Firm I is the incumbent and is the only producer in
the 1" period. Firm E is the potential entrant with 0 marginal cost but must incur
an entry cost of $1 if entering this market.
Firm I knows its marginal cost (c) but Firm E does not know for sure: it knows cis
either 0 or 5. Without any further information/signal, Firm E believes the
probability for either case is 50%.
The timing of the game is the following:
Firm I sets the price in the 1s' period (pi);
• Firm E makes its entry decision;
• Were “not enter" chosen, Firm I will remain as a monopoly in the 2nd
period and set the price at $10.
Were "enter" chosen, the two firms engage in Bertrand competition in the
2nd period.
Lastly, assume both firms have a discount factor of 0.8.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4831d77c-e72e-468b-90d2-1af2bce5871d%2F4cded171-b93c-4503-9852-2359d50df43c%2Fv1b7j8k_processed.png&w=3840&q=75)
Transcribed Image Text:2. [This question regards a business practice called "limiting pricing" where the
incumbent use price as the instrument to deter entry. Although we didn't spend
much time on this topic in class, you’ll find the issues illustrated here are closely
1
related to "advertising as a signal" (Ch. 13) and of course “entry deterrence"
(Ch 15).]
Suppose there is only 1 consumer who has a demand of a product up to 1 unit per
period. There are 2 periods. Her willingness to pay is $10 per unit.
There are two firms, I and E. Firm I is the incumbent and is the only producer in
the 1" period. Firm E is the potential entrant with 0 marginal cost but must incur
an entry cost of $1 if entering this market.
Firm I knows its marginal cost (c) but Firm E does not know for sure: it knows cis
either 0 or 5. Without any further information/signal, Firm E believes the
probability for either case is 50%.
The timing of the game is the following:
Firm I sets the price in the 1s' period (pi);
• Firm E makes its entry decision;
• Were “not enter" chosen, Firm I will remain as a monopoly in the 2nd
period and set the price at $10.
Were "enter" chosen, the two firms engage in Bertrand competition in the
2nd period.
Lastly, assume both firms have a discount factor of 0.8.
Transcribed Image Text:2.b
Show that pi = 8 will not do the job. (Hint: The question is whether a
high-cost incumbent find mimicking this strategy profitable.)
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