Question

1. Suppose a monopolist has a discount rate of 10 percent and can deter entry indefinitiely, but only by being predatory for 10 years in a row beginning with the current year and continuing for the next nine years. In each of those 10 years, the monopolist sustains an economic loss of $2 million. Thereafter, the monopolist can earn a profit of $3.5 million forever. The alternative to being predatory is to accommodate entry, in which case, the monopolist earns to the following profit flow: $4 million this year (t=0), $3 million next year (t=1), 2 million the following year (t=2) and $1 million every year thereafter (t=3 to t=oo). Using your knowledge of present value (Chapter 3, Section 3.5 of the text), does the predatory behavior make sense for the monopolist? What do the above figures suggest about John McGee's hypothesis concerning the use of predatory pricing?

Answer 1

Giveni 3.5 3.5 NPV = Fulltast New of profit, if monopolist data entry nevarat it on the poor nat har om. e pran] - 0729-33 NOV -a + Land 9.+ (1.VOT (10) 22 (1-123 (1-0) 9 214.843-13 1.333 1. Wpr by accomodating entry - utile staat..... = 4 + 2-4a7a71652893 +Chor = 8-38017 Ch 0.12 ] 01 = 8.3801+8.264) = 16.64 . This monopolist should accomodate the entreent.