Is the monopolist’s threat to charge a low price credible? That is, if the entrant has come, would  it make sense for the monopolist to charge a low price? Explain.

Is the monopolist’s threat to charge a low price credible? That is, if the entrant has come, would it make sense for the monopolist to charge a low price? Explain.

Consider a
market with a monopolist and a firm that is considering entry. The new firm
knows that if

the monopolist
“fights” (that is, sets a low price after the entrant comes in), the new firm
will lose

money. If the
monopolist accommodates (continues to charge a high price), the new firm will
make a

profit

Entrant

Enter Don’t Enter

Monopolist Price
High 20, 10 50, 0

Price
Low 5,-10 10, 0

A. Is the
monopolist’s threat to charge a low price credible? That is, if the entrant has
come, would

it make sense for
the monopolist to charge a low price? Explain.

B. What is the Nash
equilibrium of this game?

C. How could the
monopolist make the threat to fight credible?


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