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Judo Economics

In: Business and Management

Submitted By asis8888
Words 388
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1) If each buyer has a willingness to pay $200 for each unit of either the incumbent or the entrants products then the buyer is indifferent among the two. The choice made by the buyer will be based on the consumer surplus. Both the firms have identical cost structures of $100 per unit of serving buyers. The entrant would have to reduce his price to increase the consumer surplus from his product. As a result, the incumbent would respond by cutting the price to match of the entrant. This would lead to a price war with prices in a downward spiral for both the firms. The strategy for the entrant should be to price the product the same as the incumbent to avoid getting into a damaging price war. The entrant can make $100 per unit of sales.

2) If the buyer has a willingness to pay $200 for one unit of the incumbent’s product and $160 for one unit of the entrant’s products it means the entrant is already at a disadvantage. The costs are $100 per unit for incumbent and $120 per unit for entrant. The incumbent can drop its price knowing that it has a better cost structure than the entrant. If the incumbent prices its product at $ 120 per unit, the entrant cannot compete with him as at that price it won’t be making any profits and would have to stop sales.

The strategy for the entrant should be to not enter the market as it has no chance of winning the market share and make any profits.

3) If the buyer has willingness to pay $200 for either the incumbent or entrant’s product, the pricing would be based on the cost structures. The incumbent has a $120 unit cost and the entrant has an $80 unit cost. The cost per units give a clear advantage to the entrant as it can keep its prices low and still make substantial profits.
The strategy for the entrant should be to keep the prices at $120 per unit. At that price point the incumbent stops making any profits. Hence it...

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