Technology A is publicly available and will result in annual costs of CA(q) 10 + 8q. Technology B is a proprietary technology developed in EA's research labs. It involves a higher fixed cost of production but lower marginal costs CB(q) 60 + 2q. EA must decide which technology to adopt. Market demand for the new product is p = 20 – Q, where Q is the total industry output. a) Suppose EA were certain that it would maintain its monopoly position in the market for the entire product lifespan (about five years) without threat of entry. Which technology would you advise EA to adopt? What would be EA's profit given this choice? b) Suppose EA expects its rival, Ubisoft, to consider entering the market shortly after EA introduces its new product. Ubisoft will have access only to technology A. If Ubisoft does enter the market, the two firms will play a Cournot game. Which technology would you advise EA to adopt given the threat of possible entry? What will be EA's profit given 3 this choice? What will be consumer surplus given this choice? c) What happens to social welfare as a result of the threat of entry in this market? What happens to the equilibrium price? What might this imply about the role of potential competition in limiting market power?
Technology A is publicly available and will result in annual costs of CA(q) 10 + 8q. Technology B is a proprietary technology developed in EA's research labs. It involves a higher fixed cost of production but lower marginal costs CB(q) 60 + 2q. EA must decide which technology to adopt. Market demand for the new product is p = 20 – Q, where Q is the total industry output. a) Suppose EA were certain that it would maintain its monopoly position in the market for the entire product lifespan (about five years) without threat of entry. Which technology would you advise EA to adopt? What would be EA's profit given this choice? b) Suppose EA expects its rival, Ubisoft, to consider entering the market shortly after EA introduces its new product. Ubisoft will have access only to technology A. If Ubisoft does enter the market, the two firms will play a Cournot game. Which technology would you advise EA to adopt given the threat of possible entry? What will be EA's profit given 3 this choice? What will be consumer surplus given this choice? c) What happens to social welfare as a result of the threat of entry in this market? What happens to the equilibrium price? What might this imply about the role of potential competition in limiting market power?
Chapter9: Monopoly
Section: Chapter Questions
Problem 2.3P
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Transcribed Image Text:10. Electronic Arts (EA) has decided to introduce a revolutionary video game. As
the first firm in the market, it will have a monopoly position for at least some time. In
deciding what type of manufacturing plant to build, it has the choice of two technologies.
Technology A is publicly available and will result in annual costs of CA(q)
10 + 8q.
Technology B is a proprietary technology developed in EA's research labs. It involves a
higher fixed cost of production but lower marginal costs C'B (q)
= 60 + 2q.
EA must decide which technology to adopt. Market demand for the new product is
p = 20 – Q, where Q is the total industry output.
a) Suppose EA were certain that it would maintain its monopoly position in the market
for the entire product lifespan (about five years) without threat of entry. Which technology
would you advise EA to adopt? What would be EA's profit given this choice?
b) Suppose EA expects its rival, Ubisoft, to consider entering the market shortly after
EA introduces its new product. Ubisoft will have access only to technology A. If Ubisoft
does enter the market, the two firms will play a Cournot game. Which technology would
you advise EA to adopt given the threat of possible entry? What will be EA's profit given
3
this choice? What will be consumer surplus given this choice?
c) What happens to social welfare as a result of the threat of entry in this market?
What happens to the equilibrium price? What might this imply about the role of potential
competition in limiting market power?
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