In Salop’s model of entry deterrence, the unconstrained monopoly earns profits (in present value terms) equal to some amount v0. Suppose v0 = 100. If entry were to occur, the two firms would share the market, each earning v1. (A) Why do we expect 2 v1 to be less than 100 ? (B) The incumbent monopoly can prevent entry by expending a fixed and irreversible amount C that the entrant must match. What conditions on the size of C will both successfully prevent entry, and equally importantly, result in greater profit for the incumbent than by allowing entry?

In Salop’s model of entry deterrence, the unconstrained monopoly earns profits (in present value terms) equal to some amount v0. Suppose v0 = 100. If entry were to occur, the two firms would share the market, each earning v1. (A) Why do we expect 2 v1 to be less than 100 ? (B) The incumbent monopoly can prevent entry by expending a fixed and irreversible amount C that the entrant must match. What conditions on the size of C will both successfully prevent entry, and equally importantly, result in greater profit for the incumbent than by allowing entry?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.4P

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