The market for taxi services in a Midwestern town is monopolized by firm 1. Currently, any taxi services firm must purchase a $40,000 “medallion” from the city in order to offer its services. A potential entrant (firm 2) is considering entering the market. Since entry would adversely affect firm 1’s profits, the owner of firm 1 is planning to call her friend (the mayor) to request that the city change the medallion fee by $F thousand. The extensive form representation of the relevant issues is summarized in the accompanying graph (all payoffs are in thousands of dollars and include the current medallion fee of $40,000). Notice that when F > 0, the medallion fee is increased and profits decline; when F < 0, the fee is reduced and profits increase. a. What are firm 1’s profits if it does not call to change the fee (that is, if it opts for a strategy of maintaining the status quo)? b. How much will firm 1 earn if it convinces the mayor to decrease the medallion fee by $40,000 (F = −$40) so that the medallion fee is entirely eliminated? c. How much will firm 1 earn if it convinces the mayor to increase the medallion fee by $300,000 (F = $300)? d. Determine the change in the medallion fee that maximizes firm 1’s profits. e. Do you think it will be politically feasible for the manager of firm 1 to implement the change in (d)? Explain
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
