Potential entrant to pay a sunk cost

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Reference no: EM138788

Q. Consider a market with demand Q = 10 - p. currently, there is an incumbent in the market, with capacity k. There is a potential entrant, who needs to pay a sunk cost of f to enter in this market. Firms may produce any quantity that does not exceed its capacity. There is no cost of production, but there is a cost of 3 per unit of available capacity. The timing of decisions is as follows: first, the incumbent decides its capacity level; second, the entrant decides its capacity level (a decision of 0 means that it stays out); third, the firms decide how much to produce. Verify that if f = 9/4 entry is deterred (i.e., the incumbent uses excess capacity to prevent.

Reference no: EM138788

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