- Two firms, Incuumbent & Entron, can produce the same good. The market demand for the good is given by P = 180 – Q, where P is the market price and Q is the market quantity demanded. The firms must pay w = 45 per unit of output for labour and r = 45 per unit of output for capital (one unit of capital is used per unit of output), but Incuumbent may choose capacity KI units of capital before Entron decides whether to enter the market. Suppose firms each have fixed costs FI = FE = 600. Incuumbent chooses (as a Stackelberg leader) capacity KI equal to the monopoly profit-maximizing quantity. When you answer the following questions, show your work.
- Find KI. (1)
- If Entron enters, what is the post-entry Incuumbent’s equilibrium quantity qI* and what is the post-entry Entron’s equilibrium quantity qE*? (1)
- If Entron enters, what is the post-entry Incuumbent’s equilibrium profit πI* and what is the post-entry Entron’s equilibrium profit πE*? (1)
- Is Incuumbent able to prevent entry by choosing capacity KI equal to the monopoly profit-maximizing quantity? Explain. (1)
- Does the Incuumbent’s choice of capacity KI equal to the monopoly profit-maximizing quantity qualify as predatory conduct (here, limit output)? Explain. (1)
