Consider a good for which the per-period inverse-demand is p = v − Q. There are two periods and no discounting. There is an incumbent firm I that has marginal production cost C₁ < 1 in the first period. In the second period, its marginal production cost is C₂ = C₁ - λq₁, where q₁ is its output in the first period and λ € (0,2). a. Show that the incumbent will produce 91 1-C₁ 2-1 - Interpret it with respect to λ. Suppose now that there is a potential entrant E that might enter in the second period. It has marginal production cost C = C₁ and no cost of entry. Because of the latter, for the sake of clarity, suppose that the entrant always enters but may produce zero (in which case it does not enter de facto). The two firms compete quantities. b. Find the equilibrium in the second period given some C2. c. How does q₁ affect the incumbent's and entrant's profits in the second period? d. Find the equilibrium value of q₁. When is entry blockaded, deterred and accommodated, respectively?

Consider a good for which the per-period inverse-demand is p = v − Q. There are two periods and no discounting. There is an incumbent firm I that has marginal production cost C₁ < 1 in the first period. In the second period, its marginal production cost is C₂ = C₁ - λq₁, where q₁ is its output in the first period and λ € (0,2). a. Show that the incumbent will produce 91 1-C₁ 2-1 - Interpret it with respect to λ. Suppose now that there is a potential entrant E that might enter in the second period. It has marginal production cost C = C₁ and no cost of entry. Because of the latter, for the sake of clarity, suppose that the entrant always enters but may produce zero (in which case it does not enter de facto). The two firms compete quantities. b. Find the equilibrium in the second period given some C2. c. How does q₁ affect the incumbent's and entrant's profits in the second period? d. Find the equilibrium value of q₁. When is entry blockaded, deterred and accommodated, respectively?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter16: Government Regulation

Section: Chapter Questions

Problem 6E

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