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Entry into Monopoly

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Suppose a company LCD has been operating under a monopoly with large profits for many years. Another company BC (with no quality or cost advantage) plans to enter the market.

Assuming that the countries can talk to each other and know each other's moves; What would the pricing outcome be? What would happen to LCD's profits and what would determine BC's profits?

Now assuming these two companies couldn't talk to each other; what would be the effect of the game on the Price and profits of the two companies?

What does the format of this analysis pertain to?

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Solution Summary

Game theory as it applies to oligopoly pricing is examined. What would happen to LCD's profits and BC's profits are determined.

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We can analyze this situation using a payoff matrix such as the one I've attached. Since the new company has no cost or quality advantage, the profits of each company will be determined solely by its market price. Previously, LCD had the entire market, and all th profits. Now, it will be splitting the profits with the new company evenly if they both offer the same price. You can use any prices you want in the matrix, since we aren't given that information. The important thing is that the profits of both companies are much larger ...

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