Consider an incumbent that successfully links the pre-entry price and post-entry profit to prevent entry. The incumbent's monopoly profit is $10 million. If a rival successfully enters the market, the incumbent's profits will fall to $4 million. If the incumbent lowers output to 25,000 units, its rival will stay out of the market, resulting in an infinite stream of profits of $8 million annually. Due to a recent loan default, the current interest rate is whopping 210 percent. Is limit pricing profitable for the incumbent?
A. No since $4 million is less than $4.2 million.
B. No, since $1.905 million is less than $2 million.
C. Yes, since $19.05 million is greater than $2 million.
D. Linking the pre-entry price to the post-entry profit is sufficient to guarantee the profitability of limit pricing.
Answer: B
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