Reference no: EM132417924

Part a:

a) "Price competition is more damaging to a firm's profit margin than non-price competition". Discuss this statement and explain whether it is correct.

b) Under what market conditions would greater price competition be expected?

c) Does an industry as a whole have to be profitable for an individual firm to be profitable? Explain.

d) Consider the internationalisation of an industry, such as the automobile industry. What effects will this have on competition and industry profitability?

Part b:

e) What is the difference between a relative barrier to entry and an absolute barrier to entry? Provide an example of each type of entry barrier. For each example, what are the requirements for this to successfully deter entry?

f) Consider an industry consisting of an incumbent (M) and a potential entrant (E). Each year, market demand for this industry is given by P = 960 - (qM + qE), where P is price and q is quantity. The incumbent firm faces costs of CM(qM) = 120qM. The potential entrant faces costs of CE(qE) = 120qE + F.

(f.i) If the entrant faces fixed costs of entry, F = 25,000, is entry blockaded?

(f.ii) If entry is not blockaded, what is the optimal strategy for the incumbent firm? (iii) Following this strategy, what profits will the incumbent make and what level of capacity should be pre-installed?