3. Consider the following dynamic game. The monopolist (i.e., incumbent) is asse

Question

3. Consider the following dynamic game. The monopolist (i.e., incumbent) is assessing whether it is more profitable to pay a fee for exclusive rights. Once the fee is paid, no one can enter the market. In the graph, T refers to the incumbent's payoff, and T, to the potential entrant's payoff, R to the revenue after entering the market, F to the entry cost, and b to a fee for exclusive rights. Tm and nd are some positive payoffs. T-%) (" $0) First stage Second stage Do not enter Do not pay Entrant Enter Incumbent Pay for exclusive rights (entry is impossible) a. IfF> R what would happen to the market? b. IfR > F, what will be the maximum b that the monopolist is willing to pay to block the entry?

Explanation / Answer

Ans for a)

If F>R then entrant will have negative payoff hence entrant will not enter.

R-F<0

Ans b)

If F<R then incumbent will makes sure that

?m-b=>?d incentive constraint

b=?m-?d....Will be required value of b....

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