Suppose an incumbent firm (A) holds a cost advantage over a potential entrant (B). That is, A and B's total costs are given by:
A: TCA = 100QA, where QA is the quantity A produces
B: TCB = 200QB, where QB is the quantity B produces
Suppose the market demand is Q = 1200 - 2P, where Q is the market quantity and P is the market price.
Initially, suppose A is an incumbent monopolist (i.e., B is currently not in the market), what is the monopoly price, quantity, and profit? Invoking the Sylos Postulate, how much would B want to produce (i.e., B enters the market) if A stuck to the monopoly quantity? What would be A's profit if B entered the market? Now, what would be the limit price A could set to keep B out of the market? What is A's profit at this limit price? Is this a case of blockaded entry, effectively impeded entry, ineffectively impeded entry, or free entry? Explain.