An incumbent firm, Firm 1, faces a potential entrant, Firm 2 that has a lower marginal cost. The market demand curve is P = 120 – Q. First 1 has a marginal cost of $20, while Firm 2’s is $10.
a) What are the Nash-Cournot equilibrium price, quantities, and profits if there is not government intervention?
b) To block entry, the incumbent appeals to the government to require that the entrant incur extra costs. What happens to the Nash-Cournot equilibrium if the legal requirement causes the marginal cost of the second firm to rise to that of the first firm, $20?
c) Now suppose that the barrier leaves the marginal cost alone but impose a fixed cost. What is the minimal fixed cost that will prevent entry.