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There
are
many
concentration:
systematic
determinants
of
seller
In both industry A and industry B, the penalty for producing at 50 per cent of the
MES is C1 C2. This penalty is much greater in industry B than in industry A, due to
the difference in slope between the two LRAC functions.
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Inverse demand curve of incumbent monopolist: P = 100 qM & MCM=$40.This implies qM=30,
PM=$70, Profit M= ($70 $40) x $30 =$ 900.
Residual demand curve of potential entrant: P = (100 qM) qPE=70-qPE & MCPE=$50.This
implies qPE=10, PPE=$60, Profit PE= ($60 $50) x 10 = $100( Given the assumption that the
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monopolist will maintain its output forever).
However, once the new entrant starts charging a price of 60, the incumbent monopolist can no
longer continue to charge a price of 70. It has to match the price of the new entrant.
Now, monopolist matches the potential entrants price(i.e., PM=$60).
New profit: Profit M= ($60 $40) x $30 = $600. The arrival of new entrant has resulted in a 33%
decline in monopolists profit(from $900 to $600).
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35
With the industry demand curve:P=100-1.25Q and the residual demand curve faced by the
For PM=$40, the residual demand curve of potential entrant is : P PE = 40 1.25 qPE
& here, the residual demand curve is just tangent to the LRAC at output level
qPE=10. Any price less than $40, even by an infinitesimal amount, will shift the
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potential entrants residual demand curve to the left and deter entry.
Thus, in general, monopolist must set its output at a level such that the residual
demand curve of the new entrant is DPE. All points on this demand curve lie below the
average cost curve (AC), i.e., the new entrant cannot charge any price at which it can
make a profit. However, since the incumbent monopolist has a positive output level, it
enjoys economies of scale, such that its average cost is now reduced, and it can
therefore earn a profit.
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Strategic
Barriers
-Blockaded Entry
to
Entry
P
D
Pm
ACe
MCdf
0
Qm
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Strictly
strategy.
speaking,
predatory
pricing
is
post-entry
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54
are
During the first stage of predation, the predator lowers price below LRAC and sets
ppred as the price. As a result of which, the victim reduces output from qc to qpred. Total
losses for the victim is given by the area ALMJ and this is for a single period, the firm
will lose this much, per period, as long as it continues to operate.
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The monopolist profit is given by the area BNRS and the deadweight welfare losses is
given by the area SRF.
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Strategic
Barriers
to
Entry:
Predatory Pricing-Criticisms
2. Predatory Pricing: The (anti-interventionist) Chicago
school is rather sceptical about the reality of predatory
pricing.
First, the predators gain in profit in the long run must
exceed the loss resulting from price-cutting in the short
run. It may be difficult for a predator to be certain this
condition will be met.
Second, for a predatory pricing strategy to succeed in
deterring entry, the predator has to convince the entrant it is
prepared to maintain the reduced price and sustain losses for
as long as the entrant remains in business.
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was
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References
Bain,
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