Suppose that two firms, an incumbent and a potential entrant, compete in a market. If they both operate, the resulting profits for the incumbent and the potential entrant are $30 million and $5 million, respectively. If the potential entrant decides not to enter the market, the resulting profits for the incumbent and potential entrant are $100 million and $0, respectively. Assume that it is not an option for the incumbent to exit the market. 1) Which of the two possible outcomes (for the potential entrant to enter or not enter) are Pareto efficient? 2) Now suppose there are side payments available. Which of the two possible outcomes is Pareto efficient? 3) Is it possible that the incumbent will agree to pay for the introduction of side payments? 4) Now suppose that side payments are allowed, but it costs $80 million in legal fees to actually use them. Which of the two possible outcomes (for the potential entrant to enter or not enter) are Pareto efficient allocations? (For simplicity, please assume no one is made better off by the $80 million fees.)
Suppose that two firms, an incumbent and a potential entrant, compete in a market. If they both operate, the resulting profits for the incumbent and the potential entrant are $30 million and $5 million, respectively. If the potential entrant decides not to enter the market, the resulting profits for the incumbent and potential entrant are $100 million and $0, respectively. Assume that it is not an option for the incumbent to exit the market.
1) Which of the two possible outcomes (for the potential entrant to enter or not enter) are Pareto efficient?
2) Now suppose there are side payments available. Which of the two possible outcomes is Pareto efficient?
3) Is it possible that the incumbent will agree to pay for the introduction of side payments?
4) Now suppose that side payments are allowed, but it costs $80 million in legal fees to actually use them. Which of the two possible outcomes (for the potential entrant to enter or not enter) are Pareto efficient allocations? (For simplicity, please assume no one is made better off by the $80 million fees.)
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