Question

3. A three-firm Coumot industry has a demand curve of 0-20-P. +12. Find the equilibrium price, output of each Each firm has an annual total cost of 4 firm and profit per firm a) The management of firm 1 is considering a strategy of predatory pricing, since management believes that monopoly profits would far exceed current profits. What are the potential monopoly profits in this industry! b) Ignoring any antitrust concerns, management wants to at least do an investment analysis of predatory pricing. They decide that to drive the other two companies out of the market, a price of S2 per unit is needed and that it must be maintained for three years. Given that the firm has a 6 year time horizon and a 14 percent cost of capital is predatory pricing profitable? Prevent value formules show that at 14 percent interest, a stream of Sl receipts for 3 years has a present value of $2.322 and a stream of Sl receipts from year 4 to 6 has a present value of $1.576.

Answer 1

3)

3) Q=20-P TC = 49+12 TR=209-2 TR=PXQ P220-0 TR= 206 - Q = TR-TC 209-2o - (42+12) 209-89-49-12 169 -2 -12 - 2 + 164-12 to = -29+16 del don = -2 70 - 29+16zo 2 = 16 = 8 Profit= -2 + 169-12 - - 81 +16X8-12 - 64 + 128-12 - 192-12 = 180 P= 20-8

Equilibrium price = 12

Output = 8

Profit = 180

a) Predatory pricing means the pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market.

If one firm considered predatory pricing it does not affect others profit, so monopolists profit may increase.