The incumbent firm A has a cost function C(qA)=6qA. The incumbent faces potential entry by firm B, whose costs are given by C(qB)=100+12qB. The demand is given by Q(P)=120-P.

a) Calculate profits of the two firms in case the entry occurs. (Hint: Solve for Stackelberg duopoly outcomes.)

b) Suppose the incumbent firm considers producing qA =88 in order to deter the entry by firm B. Does this strategy constitute limit pricing? Is this strategy credible? (Hint: Calculate profits of each firm if qA =88.) Should the incumbent firm fight the entry or not?