The Knowlton Chemical Company plans to introduce its Bug Buster, a sex-lure trap that at¬ tracts all kinds of flying insects and beetles. The technology is simple—there is just one active ingredient, and this fact is public knowledge following a university researcher’s publication of her research findings. Knowlton has the jump on competitors, however, since they funded the research and became privy to the findings at an earlier stage. Knowlton expects to have a mo¬ nopoly on the new Bug Buster for the first year, but expects entry of two new firms in time for the second year’s “bug season,” and entry of three more in the third year. This entry is expected to take place because Knowlton’s cost advantage over the entrants is expected to be minor, since the chemical ingredient is readily available at relatively low cost. Knowlton’s estimated mar¬ ginal cost of production is $4 per unit, constant across all foreseeable output rates.

On the demand side, Knowlton expects to sell 200,000 units in the first year at a proposed price of $9.99. Its marketing research team has estimated that this is the profit-maximizing price in the first year. At that price, market demand is expected to increase to 500,000 units in the second year and to approach 1 million units in the third year. (Note that there will be entry of new firms as well.) In the second and third years, the market price of the Bug Buster and its rival products would respond to supply and demand conditions, but it would tend to be fairly similar for all firms, because of the limited scope for product differentiation that exists.

(a) From the information given, deduce an expression for the market demand curve that appar¬ ently underlies the choice of the initial price.

(b) Assuming that the slope of the market demand curve stays the same, estimate the market demand curves for the second and third years.

(c) Specify the demand curve facing Knowlton in the second and third years, in your best esti¬ mation given the data supplied.

(d) Supposing that Knowlton assumes the role of low-cost price leader, what price would it wish to set in each of the second and third years, and what are its expected output levels in each of those years?

(e) What assumptions and qualifications underlie your analysis?