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Mairoon Mairoon
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Posts: 850
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6 years ago
Suppose market demand is p = 10 - Q. Firms have a fixed entry cost of 5 and no marginal cost. If firm A is the incumbent, can it deter the entry of its rival, firm B?
Textbook 
Microeconomics

Microeconomics


Edition: 6th
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Replies
wrote...
6 years ago
Firm B's reaction function is qB = 5 - (1/2)qA. The Stackelberg leader quantity is 5 and firm B will produce 2.5. Firm A's profit is 12.5. If firm A produces 6 units for example, firm B's best response is 2 units; however, it would incur a loss and not enter. Firm A's profits by preventing entry would be 24. Thus, firm A can deter entry by overproducing.
Mairoon Author
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5 years ago
Thanks to all of you, I passed my course
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