Contestable markets.: In a market an incumbent monopoly faces the following cost

Question

Contestable markets.: In a market an incumbent monopoly faces the following cost curve C(q)=F+cq where F>0 is a fixed cost and c>0 is the marginal cost of production. A potential entrant contests the monopoly. However, due to second mover disadvantage the potential entrant faces a cost curve C(q)=(F+B)+cq where B>0. If the monopoly wants to prevent the entry of a new firm, what price and quantity it needs to sell? Show that this configuration is feasible and sustainable (or at least specify the conditions under which this statement is true). Contestable markets.: In a market an incumbent monopoly faces the following cost curve C(q)=F+cq where F>0 is a fixed cost and c>0 is the marginal cost of production. A potential entrant contests the monopoly. However, due to second mover disadvantage the potential entrant faces a cost curve C(q)=(F+B)+cq where B>0. If the monopoly wants to prevent the entry of a new firm, what price and quantity it needs to sell? Show that this configuration is feasible and sustainable (or at least specify the conditions under which this statement is true). Contestable markets.: In a market an incumbent monopoly faces the following cost curve C(q)=F+cq where F>0 is a fixed cost and c>0 is the marginal cost of production. A potential entrant contests the monopoly. However, due to second mover disadvantage the potential entrant faces a cost curve C(q)=(F+B)+cq where B>0. If the monopoly wants to prevent the entry of a new firm, what price and quantity it needs to sell? Show that this configuration is feasible and sustainable (or at least specify the conditions under which this statement is true).

Explanation / Answer

P= AC= F/q + c

new entrant price is (F+B)/q +c which is more than first mover price . so second mover will have no advantage.

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