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Suppose there are three internet service providers (ISPs) in a local market which have been around for a long time and generate healthy economic profits. Suppose that a startup fiber company enters the market. Initially, the startup captures many customers from the older ISPs but soon experiences financial problems due to the huge upfront costs associated with creating a fiber network. In order to generate more revenue, the startup decreases its price by 10%. In response, the established firms all offer price- match guarantees and an additional 5% off any matched price. The older ISPs run the price matching scheme even after the startup decides to return to its original price. Eventually, the startup goes bankrupt and the older ISPs return to the initial pricing regime. What type of strategy did the three existing ISPs employ?

Suppose there are three internet service providers (ISPs) in a local market which have been around for a long time and generate healthy economic profits. Suppose that a startup fiber company enters the market. Initially, the startup captures many customers from the older ISPs but soon experiences financial problems due to the huge upfront costs associated with creating a fiber network. In order to generate more revenue, the startup decreases its price by 10%. In response, the established firms all offer price- match guarantees and an additional 5% off any matched price. The older ISPs run the price matching scheme even after the startup decides to return to its original price. Eventually, the startup goes bankrupt and the older ISPs return to the initial pricing regime. What type of strategy did the three existing ISPs employ?

Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter14: Indirect Price Discrimination
Section: Chapter Questions
Problem 7MC
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Suppose there are three internet service providers (ISPs) in a local market which have been around for a long time and generate healthy economic profits. Suppose that a startup fiber company enters the market. Initially, the startup captures many customers from the older ISPs but soon experiences financial problems due to the huge upfront costs associated with creating a fiber network. In order to generate more revenue, the startup decreases its price by 10%. In response, the established firms all offer price- match guarantees and an additional 5% off any matched price. The older ISPs run the price matching scheme even after the startup decides to return to its original price. Eventually, the startup goes bankrupt and the older ISPs return to the initial pricing regime. What type of strategy did the three existing ISPs employ?
Transcribed Image Text:Suppose there are three internet service providers (ISPs) in a local market which have been around for a long time and generate healthy economic profits. Suppose that a startup fiber company enters the market. Initially, the startup captures many customers from the older ISPs but soon experiences financial problems due to the huge upfront costs associated with creating a fiber network. In order to generate more revenue, the startup decreases its price by 10%. In response, the established firms all offer price- match guarantees and an additional 5% off any matched price. The older ISPs run the price matching scheme even after the startup decides to return to its original price. Eventually, the startup goes bankrupt and the older ISPs return to the initial pricing regime. What type of strategy did the three existing ISPs employ?
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