In Salop’s model of entry deterrence, the unconstrained monopoly earns profits (in present value terms) equal to some amount v0. Suppose v0 = 100. If entry were to occur, the two firms would share the market, each earning v1. (A) Why do we expect 2 v1 to be less than 100 ? (B) The incumbent monopoly can prevent entry by expending a fixed and irreversible amount C that the entrant must match. What conditions on the size of C will both successfully prevent entry, and equally importantly, result in greater profit for the incumbent than by allowing entry?
In Salop’s model of entry deterrence, the unconstrained monopoly earns profits (in present value terms) equal to some amount v0. Suppose v0 = 100. If entry were to occur, the two firms would share the market, each earning v1. (A) Why do we expect 2 v1 to be less than 100 ? (B) The incumbent monopoly can prevent entry by expending a fixed and irreversible amount C that the entrant must match. What conditions on the size of C will both successfully prevent entry, and equally importantly, result in greater profit for the incumbent than by allowing entry?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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In Salop’s model of entry deterrence, the unconstrained monopoly earns profits (in present value terms) equal to some amount v0. Suppose v0 = 100. If entry were to occur, the two firms would share the market, each earning v1.
(A) Why do we expect 2 v1 to be less than 100 ?
(B) The incumbent monopoly can prevent entry by expending a fixed and irreversible amount C that the entrant must match. What conditions on the size of C will both successfully prevent entry, and equally importantly, result in greater profit for the incumbent than by allowing entry?
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