We are a regional leader in industrial ice machines and only face competition from one other vendor in our relevant market. Because of our preferred supplier contracts we are able to bring our product to the market before our rival does, so we currently have a Stackelberg leadership advantage.

Moreover, we are out competing our rival in terms of marginal costs. Our accounting department has informed me that our monthly costs are roughly C(Q1) = 1,200 + 4Q1, while those of the competitor are C(Q2) = 1,000 + 8Q2.

According to our sales department we are both facing the following inverse monthly market demand curve: P(Q) = 600 - 2Q.

Since we have enough capacity to supply the entire relevant market in this time period, we are considering buying the rights of our competitor to become the sole supplier to the relevant market. Before I go into negotiations, I would like you to estimate what our maximum willingness to pay should be for monopoly control of the relevant market. I want to make sure that I do not over-pay!

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Question 34

10pts

A new minor league baseball stadium is opening soon and the owner is only allowing local, family-owned restaurants to sell within the park. Two hotdog vendors are set to sell within the stadium: (i) The HOT Dog and (ii) Ballpark Frankies. The Baseball park necessitates that the vendors set their prices at the beginning of each season and then hold the price constant during the games that occur that season. The fans are not sensitive to the quality of the hotdog, just the price.

The two vendors have every inclination to stay in the ballpark for the life of their firms, so imagine that this will be an infinitely repeated game. Based on relative prices, the potential payoffs for the season are listed below:

The HOT DogBallpark FrankiesLow PriceHigh PriceLow Price$10,000 , $10,000$90,000 , -$3,000High Price-$3,000 , $90,000$20,000 , $20,000

Given the high current interest rate of 10%, The HOT Dog is considering to post a high price in the inaugural season and hope that Ballpark Frankies follows as well with a high price of their own. Evaluate if this is a risky strategy for The HOT Dog.

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