7) Technology choice and entry You are considering launching a cable network in

Question

7) Technology choice and entry You are considering launching a cable network in a local market. Currently there is one incumbent, CN. Your technology has the same service characteristics as CN. You incur a fixed cost of $1000 for running the network and a variable cost of $20 per customer. CN, on the other hand, has a choice of technologies, with identical service characteristics but different cost structures. You have to decide whether to enter and, if so, what price to set for your service. CN will then set its own price in response to yours. Please find your optimal decisions under the following 3 scenarios, which all have the same structure but differ (only) in the cost structure of CN. a)What happens when the incumbent's cost structure changes? What is driving this outcome? b)lf you were the incumbent and there was no threat of entry, which cost structure would you choose? c)If you were the incumbent and there IS a threat of entry, which cost structure would you choose? How can you accomplish that in practice?

Explanation / Answer

A) When incumbent's cost structure changes in scenario 1/2/3 then there is a change in its profit earned and    also in its number of customer as shown in table below;

Selling Price and the cost structure are the major drivers of the outcome.

B) When ther is no threat of entry incumbent shall opt for either scenario II or III as inn either case CN will earn equal amount of profit by serving equal number of customers . But if we talk about fixed cost expenditure CN should opt for Scenario II as fix cost is less in scenario II as compared to Scenario III. thisscenario will help CN in case number of customers changes. Details are as table below;

Case 1. FC 1000 VC 30 Profit 8 SP 48 Number of customers 56 Case 2. FC 3000 VC 20 Profit -1698 SP 41 Number of customers 62 Case 2. FC 4000 VC 10 Profit -2367 SP 33 Number of customers 71

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