Defending Your Market

Balboa Technology Group

Youare themanager inchargeofBalboaTechnologyGroup'sstandmixercontrolchipdivision. Balboa currentlyproducescontrolchipsfor $8achip. However,thereisstillasignificantlearning curve that Balboa is facing---their cost of production in the second period is $81/6, where 1 is the number of units sold in the first period.

The Stand Mixer Control Chip Market

The stand mixer control chip market is characterized by a demand curve t=24t, where t is the lowest price offered for a unit of stand mixer control chips.

Lang Electronics

LangElectronicsisconsideringenteringthestandmixercontrolchipmarket.Theyspecializein buildinglowmarginalcostproductionfacilitiestheir anticipatedmarginalcostis$4,andtheir anticipatedfixedcostis$36.NotethatLangiswell-informedabouttheindustry,andinparticular will know the marginal cost of Balboa in the second period.

Entering the Chip Market

Balboamustfirstdecide howtopriceinthefirstperiod.Oncethemarkethasclearedinthefirst period,Langmustdecidewhethertoenter;ifLangchoosestoenter,thenLangmustchoosethe price at which to offer their control chips. Balboa then chooses the prices to offer its control chips in the second period.

Whatpricewillyousetinthefirstperiod?_______. DoyouexpectLangtoenter? _________.

(To keep the calculations simple, assume that if consumers are indifferent between the chips offered by Balboa and Lang, they choose Balboa.)