A three-firm Cournot industry has a demand curve of

Q= 20 - P

Each firm has an annual total cost of 4q_i + 12 . Find the equilibrium price, output of each firm and profit per firm

a) The management of firm 1 is considering a strategy of predatory pricing, since management believes that monopoly profits would far exceed current profits. What are the potential monopoly profits in this industry?

b) Ignoring any antitrust concerns, management wants to at least do an investment analysis of predatory pricing. The decide that to drive the other two companies out of the market, a price of $2 per unit is needed and that it must be maintained for three years. Given that the firm has a 6 year time horizon and a 14 percent cost of capital, is predatory pricing profitable? Present-value formulas show that at 14 percent interest, a stream of $1 receipts for 3 years has a present value of $2.322 and a stream of $1 receipts from year 4 to 6 has a present value of $1.576.