Consider a homogeneous product industry with inverse demand given by p(Q) = 100 – 20. There is currently one incumbent firm and one potential entrant. Entry into the industry requires a sunk cost of F. Both firms have the same variable cost function: C(q) = 10q. (a) Determine the incumbent's optimal output in the absence of the entry threat. (b) What output should the incumbent firm set to deter entry? (Your answer will be a function of F!) (c) Assuming that the incumbent firm decides to deter entry, determine the Lerner index as a function of F. Discuss the result.

Consider a homogeneous product industry with inverse demand given by p(Q) = 100 – 20. There is currently one incumbent firm and one potential entrant. Entry into the industry requires a sunk cost of F. Both firms have the same variable cost function: C(q) = 10q. (a) Determine the incumbent's optimal output in the absence of the entry threat. (b) What output should the incumbent firm set to deter entry? (Your answer will be a function of F!) (c) Assuming that the incumbent firm decides to deter entry, determine the Lerner index as a function of F. Discuss the result.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter18: Auctions

Section: Chapter Questions

Problem 18.6IP

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