Consider a market with an incumbent firm, a potential entrant and a buyer with demandD(p) = 180 - p.Suppose the potential entrant is more efficient than the incumbent. The entrant has a unitproduction cost of $10 whereas the incumbent has a cost of $20 per unit. However, theentrant has to pay an entry cost of F = 500. Before entry, the incumbent can propose thebuyer to sign an exclusive contract in exchange of a payment t to the buyer. An exclusivecontract prevents the buyer to purchase from the entrant. The timing is as follows:1. Incumbent offers buyer exclusive contract with payment t2. B accepts or rejects3. E decides to enter or not4. active firms name price to B5. B chooses supplier (respecting exclusive contract if in place)(a)Suppose no exclusive contract has been signed. Derive the equilibriumprices, profits and consumer surplus if (i) the entrant enters and (ii) the entrant does notenter.(b)Give the minimum amount the incumbent has to pay to induce the buyerto accept the exclusive contract. Give the maximum amount the incumbent is willingto pay for an exclusive contract. Compare and t and explain - in 5 to 7 sentences - theoverall outcome of the game.

An entity that already exists and competes in a certain market is known as an incumbent firm. The…

(a) Suppose no exclusive contract has been signed. Derive the equilibrium prices, profits and consumer surplus if (i) the entrant enters and (ii) the entrant does not enter. (b) Give the minimum amount î the incumbent has to pay to induce the buyer to accept the exclusive contract. Give the maximum amount the incumbent is willing to pay for an exclusive contract. Compare and i and explain - in 5 to 7 sentences - the overall outcome of the game.

(a) Suppose no exclusive contract has been signed. Derive the equilibrium prices, profits and consumer surplus if (i) the entrant enters and (ii) the entrant does not enter. (b) Give the minimum amount î the incumbent has to pay to induce the buyer to accept the exclusive contract. Give the maximum amount the incumbent is willing to pay for an exclusive contract. Compare and i and explain - in 5 to 7 sentences - the overall outcome of the game.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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