Problems 1 4 are on Predatory Pricing. Assume the following: When the Incumbent is a monopolist, it faces demand @, = 50 5P, The Incumbent's cost to make one unit of output is , = 4 After an Entrant enters the market, the Incumbent faces annual demand @; = 40 8P, 4+ 4P and the Entrant faces annual demand Q = 40 8P + 4P, The Entrant's cost to make one unit of output is C = 4. The Entrant faces annual fixed costs Fy = 20. If the Entrant exits, the Incumbent enjoys Monopoly profits for six periods before another firm enters. When the Incumbent is a monopolist, it's profit maximizing price is P, = 7. The Incumbent sells ; = 15 and eams Profit; = 45. If the Entrant enters the market and the Incumbent accommodates the entry (i.e., doesn't engage in predatory behavior), the Differentiated Bertrand equilibrium is P, = Pz = 6. Both firms sell Q; = @ = 16 units of output. The Incumbent's profits are Profit; = 32 and the Entrant's profits are Profit; = 12. The Entrant's profits are lower than the Incumbent's because it incurs fixed costs F = 20. You should be comfortable deriving these results. 1. If the Incumbent charges an arbitrarv price P, what price will the Entrant set? To answer this question, derive the Entrant's profit- maximizing condition. mo 0w Py = 4.75 4 5P, Py = 4.25 + .25P, Py = 4.5+ .25P, Py =525+P, Py =5+ 5P, 2. Assume the Incumbent sets price P; = 4.25. What profits will the Incumbent earn? Will the Incumbent's attempt to force the Entrant from the market work? Does the Incumbent's predatory behavior satisfy the Supreme Court's 2-part rule from Brooke versus Brown and Williamson Tobacco (1993) Mo 0w Profit; = 7.06, the Entrant will Exit. The 2-part rule is satisfied. Profit; = 7.06, the Entrant will Exit. The 2-part rule is not satisfied. Profit; = 7.66, the Entrant will Exit. The 2-part rule is satisfied. Profit; = 7.06, the Entrant will not Exit. The 2-part rule is satisfied. Profit; = 7.66, the Entrant will not Exit. The 2-part rule is not satisfied. 3. Re-do Problem 2 assuming the Entrant's fixed costs are Fz; = 15. Will the Incumbent's attempt to force the Entrant from the market work? A. B. . Yes No Uncertain 4. Continue to assume the Entrant's fixed costs are Fy = 15 but assume the Incumbent sets price P, = 3. Will the Incumbent's attempt to force the Entrant from the market work? Does the Incumbent's predatory behavior satisfy the Supreme Court's 2-part rule from Brooke versus Brown and Williamson Tobacco (1993)? moowp The Entrant will Exit. The 2-part rule is satisfied. The Entrant will Exit. The 2-part rule is not satisfied. The Entrant will not Exit. The 2-part rule is satisfied. The Entrant will not Exit. The 2-part rule is not satisfied. Not enough information provided to answer the