Unformatted text preview: 1 = c - x Thus
Thus F1 could choose an investment level
that yields zero profits for F2
that PR2 = (1-c-x)2 / 9 – FC = 0 The „predatory“ level of investment would be
xp = 1 – c – 3 FC0.5
x (0, qm ) = a−c
2b q1 = a−c
40 Strategic Investments x(p)
x(p) is higher than short run profitabilty
x(i) would be the level incumbent would
choose without entry threat
choose However, x(p) may maximize long run profits
if entry is deterred.
not clear, though. Sunk cost of x(p) maybe so high,
that it could be profitable to co-exist with entrant.
41 Strategic Investments Also: even if x(p) preempts entry, we could not
tell whether the over-investment is antitell
1. the more the incumbent lowers its cost, the lower is
the monopoly price that it charges in the future consumers will gain from the investment through
price reduction caused by cost-decreasing
investment 1. No possibility to identify predation, as Note: an efficient monopolist may price lower than a less
there is no evident benchmark for investments (unlike for
prices with p<AVC)
and low prices are reversible, but most investments are not consumers will benefit even after
42 Bundling/Tying Often
Often a product is offered by the seller
under the condition that another product is
also bought („tie-in sales“ or „tying“).
Newspaper with TV programme supplement
on Sunday forced to pay higher price for
the Sunday issue.
the Computers include operating system and
43 Tying: efficiency reasons Assembling
Assembling all parts of a computer is more
costly for the consumer than buying a ready-tocostly
use computer. „divison Also: of labor“ and scale economy arguments asymmetric information argument driving
driving a car with different tyres than recommended
by producer may become dangerous
by poor performance of copy machine if other than
recommended toner is used
recommended tying is profitable for firm for certain products, but
also good for consumers
but it has to be checked carefully if tying is reasonable or
if other simple solutions could help, e.g. indicate which toner
is appropriate and which is not.
44 Tying as price discrimination device
to 2‘s willingness
to Good A 7 4 Good B 5 8 Goods A and B 12 12 • Monopolists sells A and B to two consumers, 1 and 2.
• Consumers have different willingness to pay for the goods, but firm
cannot charge different prices to them (consider it as illegal).
• If products sold separately, firm will choose price of A at 4,
and of B at 5.
• Profit (assume cost is zero) on A = 8, B = 10, total profit = 18.
• Sell as bundle at price 12 profit equal to 24.
45 Assessment of Tying Practices Tying
Tying is only problematic if it has exclusionary
effects Thus: should only be considered as suspicious if
firm in question has a dominant position in the
If firm has less than 40% in a market, EC should not
investigate Also OK, as tying typically has efficiency effects Tying may allow a non-dominant firm to become more
46 Ilford example Kodak dominated UK colour film market in the 1960s
Kodak about 80% market share
Ilford only had 15% and worse development technology than Kodak
Several independent film processors could not develop Ilford
films Ilford sold film with development included.
Ilford Once you took your pictures, you sent the film to Ilford labs
That excluded independent processing labs who filed a
complaint to competition authorities
complaint decrease in demand for their service
decrease Ilford‘s exclusionary tying practice was forbidden
Ilford exited the colour film market in 1968. This is an example were anti-trust authorities possibly
harmed welfare as Kodak became monopolist
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This note was uploaded on 01/22/2014 for the course ECON D0T32A taught by Professor Czarnitzkidirk during the Spring '13 term at Katholieke Universiteit Leuven.
- Spring '13