Maintaining monopolj.F power: entryr deterrence 'vs' buyout Consider the market for a homogeneous good with demand given bv PIKE] = 34 4Q. Let there be a single incumbent rm [I] in the market and a single potential entrant [E]. Each rm i = I or E has access to the same technology,r characterised by cost function Cris-l 2 2%: + F. with 2 c: F s: 16 {the constraint 2 s: F ensures that entry,r deterrence is preferred to accommodation and F s: 16 ensures that both rms can reap positive prots under Stackelberg competition}. Consider two scenarios: Scenario 1 [limit pricing}: The incumbent can commit to a post-entry quantityr and the entrant believes that the incumbent will carrj,r out its threats. However, the incumbent is not allowed to bujl,r out the entrant. Scenario 2 [buyout]: The incumbent cannot commit to a post-entryr quantity; the entrant rationally believes that the incumbent will accommodate entry once the entrant is in. However. the incumbent has the option to buy out the entrant before production begins. If the incumbent buvs out the entrant, it becomes a monopolv. We want to know which of the two scenarios the incumbent prefers depending on F. (c) Suppose we are in Scenario 2. The timing of the events is as follows. First, the incumbent decides whether or not to make a buyout oEer to the entrant and how much to offer if it does. Second, the entrant decides whether to accept the otter. If the entrant accepts: the incumbent pays it its offer and becomes a monopolist. If the entrant rejects [or no offer is made in the rst place}: the rms compete by playing the Stackelberg game [with the incumbent as the leader]. i. 5 marks How much must the incumbent olier the entrant to make it stag; out? ii. If the incumbent makes this minimum oer, what will be its nal prot {net of the price it paid to bu},-r out the entrant}