Assume the following given situation: An INCUMBENT su
Question and Solution
Assume the following given situation: An INCUMBENT successfully linked the â€œPRE-ENTRY PRICEâ€ & â€œPOS
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Assume the following given situation: An INCUMBENT successfully linked the â€œPRE-ENTRY PRICEâ€ & â€œPOST-ENTRY PROFITâ€ to PREVENT ENTRY!
â€¢ The Incumbent's Monopoly Profit = $10 Million
â€¢ If a RIVAL successfully enters the market, the incumbent's profits will FALL to $4 Million
â€¢ If the incumbent LOWERS output to 25,000 units, its rival will STAY OUT of the market resulting in an infinite stream of profits of $8 Million ANNUALLY
â€¢ Because of a recent "LOAN DEFAULT," the current INTEREST RATE = 210 PERCENT
Given the described situation above, would "LIMIT PRICING" be considered to be â€œPROFITABLEâ€ for the INCUMBENT?
I) Yes, considering $8 Mil. is GREATER than $4 Mil. II) Yes, considering $19.05 Mil. is GREATER than $2 Mil. III) No because $4 Mil. is LESS than $4.2 Mil. IV) No because $1.91 Mil. is LESS than $2 Mil. V) Linking the â€œPRE-ENTRY PRICEâ€ to the â€œPOST-ENTRY PROFITâ€ is sufficient to â€œGUARANTEEâ€ the profitability of â€œLIMIT PRICINGâ€
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