You continue to own and operate Rockit Asphalting services but are no longer the only supplier. The monopoly profits you were earning attracted entry and the collusive agreement you offered to your new competitors did not succeed. Your business is still the dominant firm but now there exists a competitive fringe. The competitive fringe produces with total cost: Cf = 3qf. So marginal cost equals 3 which also represents the fringe supply curve. There also been some changes to the costs of your firm. The costs for your firm are now: Cd = 2Qd. And market demand is now: p = 10 − Q. Finally, note that the change in total costs for your firm has also produced a capacity constraint. Your firm cannot expand beyond ?? ≤ 5. a) Given these changes to the market structure that your supply, compute your firm’s output and profits. b) Suppose that you have a strategy to gain market share by raising the costs of your rivals (the fringe producers.) This strategy allows you to increase the marginal cost of the fringe firms to 4. What are your profits under this raising rivals cost strategy? How much do you produce?
You continue to own and operate Rockit Asphalting services but are
no longer the only supplier. The
entry and the collusive agreement you offered to your new competitors did not
succeed. Your business is still the dominant firm but now there exists a
competitive fringe.
The competitive fringe produces with total cost:
Cf = 3qf.
So marginal cost equals 3 which also represents the fringe supply curve. There
also been some changes to the costs of your firm. The costs for your firm are
now:
Cd = 2Qd.
And market demand is now:
p = 10 − Q.
Finally, note that the change in total costs for your firm has also produced a
capacity constraint. Your firm cannot expand beyond ?? ≤ 5.
a) Given these changes to the market structure that your supply, compute
your firm’s output and profits.
b) Suppose that you have a strategy to gain market share by raising the
costs of your rivals (the fringe producers.) This strategy allows you to
increase the marginal cost of the fringe firms to 4. What are your profits
under this raising rivals cost strategy? How much do you produce?
c) Suppose that to implement this strategy you need to negotiate with
downstream suppliers to only supply vital inputs to your firm. This
reduces the supply of inputs to your competitors; thereby, increasing the
costs of their inputs. The downstream suppliers only agree because you
agree to pay them more for the input you need. If you agree to the new
price your marginal cost increases to 2.75. Should you implement the
raising rivals cost strategy? In otherwords, is the strategy profit
maximising? You must provide support for your conclusions.
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