ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Verizon can be viewed as a first mover. Now suppose both ATT and Verizon are considering whether and how to enter a potential market.
Market demand is given by the inverse demand function p= 900−q1−q2, where p is the market price margin, q1 is the quantity sold by Verizon and q2 is the quantity sold by ATT.
To enter the market, a retailer must build a store. Two types of stores can be built: Small and Large. The Small store requires an investment of $50,000, and it allows the retailer to sell as many as 100 units of the goods at zero marginal cost. Alternatively, they can pay $175,000 to construct a Large store that will allow it to sell any number of units at zero marginal cost.
Assume Verizon stays out of the potential market (i.e. chooses not to enter N1 at the first stage, q1= 0).
Calculate Verizon's profit for the following cases:
a.) ATT chooses not to enter N at the second stage after viewing Verizon's choice.
b.) ATT chooses to build a Small store S at the second stage after viewing Verizon's choice.
c.) ATT chooses to build a Large store L at the second stage after viewing Verizon's choice.
Expert Solution
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Step 1
Given that.
P = 900 – q1 – q2
For small store, I = 50,000
And MC = 0
For super market I = 1,75,000
And MC = 0
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Step 2
a) Verizon stays out of market q1 = 0 and ATT also chooses not to enter therefore
Profit for ATT = 0
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