Consider the Dixit model, where an incumbent (firm 1) installs capacity in period 1 at cost r = 50 per unit. In period 2, firm 1 chooses the level of production at cost w = 50 per unit up to the level of capacity installed in period 1. Also, in period 2 a potential entrant enters the market and chooses a level of capacity and production at cost of w + r = 50 + 50 = 100 per unit. Assume the demand curve facing this market is P = 180 – Q, and both firms have fixed (sunk) costs of 350. It can be shown that if firm 1 invests in capacity (and production) of 4 units above the monopoly level, they are able to prevent the entry of firm 2. How much extra profit does firm 1 make from this strategy?
Consider the Dixit model, where an incumbent (firm 1) installs capacity in period 1 at cost r = 50 per unit. In period 2, firm 1 chooses the level of production at cost w = 50 per unit up to the level of capacity installed in period 1. Also, in period 2 a potential entrant enters the market and chooses a level of capacity and production at cost of w + r = 50 + 50 = 100 per unit. Assume the demand curve facing this market is P = 180 – Q, and both firms have fixed (sunk) costs of 350. It can be shown that if firm 1 invests in capacity (and production) of 4 units above the
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