We are currently the only supplier of restaurant/hospitality ice machines in the Midwest Region. Having a monopoly in the market, we have enjoyed strong profits from this market. Our current inverse demand function for our ice machines is P = 3,000 – 5Q and our costs are TC = 150,000 + 100Q. Our current price for an ice machine is $1,400 and we are typically selling 320 machines per year. Our current profits are exceeding $265,000. We are interested in knowing if we are currently optimizing our monopoly profits at a price of $1,400. I have suggested to my colleagues that we could increase price and realize greater profits. Given our success in the Midwest Region, we have learned that a competitor BSW Ice is potentially planning to enter the Midwest market. If they do enter, we may have to change our pricing strategy as we will lose our monopoly power and need to compete with BSW Ice as a Cournot Duopoly. To avoid this potential competition, I have suggested to our CEO that we should inquire about purchasing BSW Ice at a price of $200,000 per year. Can you please provide an analysis to determine if paying $200,000 to acquire BSW Ice is worth it to protect our monopoly profits? In your analysis, you do not have to consider multi-year payments or present value calculations – just base your analysis on a one-year period. Given that the production of ice machines has similar cost structures among companies, our accounting department has estimated that BSW Ice’s costs are the same as ours. In addition, the market demand that we face as the sole provider of ice machines will not change if BSW Ice enters, so you may use the monopoly inverse demand function in your analysis for the Cournot competition. In your analysis, can you please be specific in answering the following questions that my CEO has asked: Is a price of $1,400 per ice machine the profit maximizing price for us to charge as a monopoly? If not, what is the profit-max price and what is the associated profit? If BSW Ice enters the market and we have to compete as a Cournot Duopoly, what will our price, output, and profit be? How much will our profits suffer? Is $200,000 an appropriate amount to pay to acquire BSW Ice to maintain our monopoly power? Should we buy BSW Ice? Why or why not?
We are currently the only supplier of restaurant/hospitality ice machines in the Midwest Region. Having a
Given our success in the Midwest Region, we have learned that a competitor BSW Ice is potentially planning to enter the Midwest market. If they do enter, we may have to change our pricing strategy as we will lose our monopoly power and need to compete with BSW Ice as a Cournot Duopoly. To avoid this potential competition, I have suggested to our CEO that we should inquire about purchasing BSW Ice at a price of $200,000 per year. Can you please provide an analysis to determine if paying $200,000 to acquire BSW Ice is worth it to protect our monopoly profits? In your analysis, you do not have to consider multi-year payments or present value calculations – just base your analysis on a one-year period.
Given that the production of ice machines has similar cost structures among companies, our accounting department has estimated that BSW Ice’s costs are the same as ours. In addition, the market demand that we face as the sole provider of ice machines will not change if BSW Ice enters, so you may use the monopoly inverse demand function in your analysis for the Cournot competition.
In your analysis, can you please be specific in answering the following questions that my CEO has asked:
- Is a price of $1,400 per ice machine the profit maximizing price for us to charge as a monopoly? If not, what is the profit-max price and what is the associated profit?
- If BSW Ice enters the market and we have to compete as a Cournot Duopoly, what will our price, output, and profit be? How much will our profits suffer?
- Is $200,000 an appropriate amount to pay to acquire BSW Ice to maintain our monopoly power? Should we buy BSW Ice? Why or why not?
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