Part 1 Limit Pricing
Suppose that market demand is described by P = 100 − (Q + q), where P is the market price, Q is the output of the incumbent firm, and q is the output of a potential entrant to the market. The incumbent firm’s total cost function is T C(Q) = 40Q, whereas the cost function of the entrant is C(q) = 100 + 40q, where 100 is a sunk cost incurred to enter the market.
Part 2 – Network Issue
Part 3 – Two-sided Market and New Economy
The software industry is intensely competitive. Microsoft does not have monopoly power over operating systems, nor does it act like a company with monopoly power. Microsoft’s pricing for Windows is far, far lower than what a rational, profit- maximizing company with a monopoly over operating systems would charge. Computer manufacturers pay Microsoft a royalty for their license to Windows that is considerably less than 5 percent of the price of a typical new PC. Application of a standard economic formula for pricing by a monopolist shows that Microsoft charges less than one-sixteenth the price for Windows that a monopolist would charge.
Figure 3.2 (Monopoly versus Competition)
Consider a two-sided platform that matches men and women who are interested in finding a marriage partner. The platform sets a price for men to access the platform and a price for women to access the platform. These prices are chosen to maximize the platform’s profits. Assume the platform is the only one in the market.
Figure 9.9: a) Buyer’s value from the platform; b) Seller’s value from the platform
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