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# Barriers to Entry and Limit Pricing

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Suppose that, prior to other firms entering the market, the maker of a new smartphone (Way Cool, Inc.) earns \$100 million per year. By reducing its price by 50 percent, Way Cool could discourage entry into â??itsâ? market, but doing so would cause its profits to sink to -\$5 million. By pricing such that other firms would be able to enter the market, Way Coolâ??s profits would drop to \$75 million for the indefinite future. In light of these estimates, do you think it is profitable for Way Cool to engage in limit pricing? Is any additional information needed to formulate an answer to this question? Explain

https://brainmass.com/economics/managerial-economics/barriers-entry-limit-pricing-328315

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Suppose that, prior to other firms entering the market, the maker of a new smartphone (Way Cool, Inc.) earns \$100 million per year. By reducing its price by 50 percent, Way Cool could discourage entry into â??itsâ? market, but doing so would cause its profits to sink to -\$5 million. By pricing such that other firms would be able to enter the market, Way Coolâ??s profits would drop to \$75 million for the indefinite future. In light of these estimates, do you think it is profitable for Way Cool to engage in limit pricing? Is any additional information needed to formulate an answer to ...

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## Oligopoly & entry deterrence

I have marked (at the end of the Question) what I believe to be the correct answers. I just need some justification and reasons if I am wrong and answers for the NOT SURE questions:

1. What is the most important characteristic of oligopoly? ??Not Sure
a. firms have market power
b. product differentiation
c. barriers to entry
d. interdependence of profits
e. none of the above

2. Which of the following methods do oligopolies use to compete for sales? ??Not Sure
a. price competition
d. both a and b
e. all of the above

3. Interdependence occurs when ??Not Sure
a. firms take the actions of other firms into account when making price and output decisions.
b. all firms in an industry are affected by the same gen. economic conditions, like consumer incomes & unemployment rate.
c. firms cooperate to increase profit.
d. both a and b
e. all of the above

4. Which of the following is an example of strategic entry deterrence? E
a. price reductions
b. building excess capacity
c. economies of scale
d. both b and c
e. both a and b

5. A form of strategic entry deterrence is D
a. forming a cartel.
b. maintaining excess capacity.
c. limit pricing
d. both b and c
e. all of the above

6. One reason a firm or firms might charge a price lower than its profit-maximizing price is D
a. to discourage the entry of new firms.
b. to follow a tit-for-tat strategy.
c. to erect multiproduct barriers to entry.
d. both a and c
e. all of the above

7. Profits are interdependent in oligopoly markets because E
a. products are differentiated.
b. managers are trying to set prices cooperatively in order to maximize total industry profit.
c. entry into the market is restricted by some form of entry barrier.
d. each firm in the market is relatively large.
e. all of the above

8. If incumbent firm Dell threatens potential new entrant Rising Star with the threat, "If you enter this market, we will lower our price and keep it low until you are driven out of the market," then ??Not Sure
a. Rising Star would never go ahead and enter if Dell has a cost advantage over Rising Star.
b. Rising Star's decision to enter will be unaffected by the threat if the threat is not credible.
c. Dell is making a strategic move designed to increase its profits at the expense of Rising Star.
d. both b and c.
e. all of the above

9. Oligopolists recognize their interdependence because ??Not Sure
a. there are few firms in the market.
b. the product is differentiated.
c. industry sales are large.
d. both a and b
e. all of the above

10. In game theory, a dominant strategy is D
a. a strategy used by a large firm to compete against smaller firms.
b. a strategy followed by the price leader.
c. a strategy involving a high risk but also a high return.
d. a strategy that leads to the best outcome no matter what a rival does.
e. none of the above

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