2011HW1 - the incumbent continues to monopolize the market...

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Economics 210C Problem Set #1 (Due April 15) Spring 2011 1. Consider a market with an incumbent monopolist, which is currently produc- ing and a potential entrant, which may or may not choose to enter. Both the incumbent monopolist and the potential entrant have assess to a collection of production technology: Each technology in this collection is characterized by a constant marginal cost c and a fixed cost 15-4c for some c [1 , 3]. Each firm may choose any technology in this collection, but it can make this choice once only. Each firm’s choice of a technology is known to the other firm. There are two periods of production. In period 1, the incumbent monopolist selects a tech- nology and then produces. In period 2, the entrant decides whether to enter or not. When deciding to enter, the entrant chooses a technology and then plays the Cournot duopoly game with the incumbent. If the entrant does not enter,
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Unformatted text preview: the incumbent continues to monopolize the market. Assume that the entrant will enter only if it can make positive profits, and that neither firm discounts its profits in period 2. Assume further that market demand in each period is D ( p ) = 9-p . a. In the absence of the potential entrant, what technology would the incumbent select? With this technology of the incumbent, would the entrant enter? If yes, with which technology? c. Is there any technology the incumbent could take in period 1 that would deter entry by the entrant? If yes, what range of technologies can accomplish this? d. Given the threat of entry, what is the course of action for the incumbent, and how does the entrant respond in subgame-perfect equilibrium? 2. Exercise 12.C.4. 3. Exercise 12.C.9. 4. Exercise 12.D.4. 1...
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