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Unformatted text preview: fixed, as was done previously)? e) Moving beyond this particular model, does product positioning involve a first‐mover advantage or a second‐mover advantage, or does it depend upon the particular aspects of the market in question? Problem 2 Consider a homogeneous product industry with inverse demand given by p = 100 – 2Q. Variable cost is given by C = 10q. There is currently one incumbent firm and one potential competitor. Entry into the industry implies a sunk cost of F. a) Determine the incumbent’s optimal output in the absence of potential competition. b) Suppose the entrant takes the incumbent’s output choice as given. Show that the entrant’s equilibrium profit is decreasing in the incumbent’s output. c) What output should the incumbent firm set to deter entry? d) Assuming that the incumbent firm decides to deter entry, determine the Lerner Index as a function of F. Discuss the result. e) Determine th...
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