Suppose that a market is currently served by a single firm protected by high entry costs from any potential competition. Then imagine fixed entry costs gradually falling in a model where any competition will be with quantity as the strategic variable. Describe how you would expect output price to evolve as entry costs fall.
What will be an ideal response?
Initially, the monopolist produces at the monopoly price and produces the monopoly quantity. As fixed entry costs fall, he will at some point begin to produce more than the monopoly quantity in order to deter an entrant from coming into the market. Price therefore falls gradually as fixed entry costs fall. At some point, fixed entry costs are sufficiently low such that the incumbent no longer deters entry -- and the first entrant comes into the market.
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Price discrimination always harms consumers
a. True. b. False.
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