Exclusive dealing contracts as a barrier to entry. Market structure 1 incumbent, 1 entrant Demand N buyers, Each buyer buys one unit, Willingness to pay = v > cH > c > cL Competition with no contract Bertrand Average Costs Incumbent AC = c Entrant AC equals cL < c with probability p Entrant AC equals cH > c with probability 1 p a) (10 marks). Uncertain entry i. Calculate and explain the profit maximizing exclusive dealing contract and the number of buyers that will be offered the contract. ii. Determine for what values of the parameters (v, c, p, cL, cH, N) the contract increases the profits of the incumbent relative to the no contract case. iii. Explain why the profit maximizing contract leaves welfare unchanged b) (10 marks). Economies of scale. Now assume that the model is the same as part a) except that the cost assumptions are the ones given below. Average Costs Entrant and incumbent AC are L-shaped & identical AC falls for Q Q*, AC = c for Q Q* i. Calculate and explain the profit maximizing exclusive dealing contract and the number of buyers that will be offered the contract. ii. Determine for what values of the parameters (v, c, Q*, N) the contract increases the profits of the incumbent relative to the no contract case. iii. Explain why the profit maximizing contract leaves welfare unchanged