A new firm enters a market that is initially serviced by a Cournot duopoly charging a price of $20

Marketing Jan 11, 2021

A new firm enters a market that is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms coexist after the entry?

A. $20

B. Above $20

C. Below $20

D. None of the preceding answers is correct.

Expert Solution

The correct answer is: C. Below $20

When a third firm enters a Cournot duopoly so that we now have three firms, the effect will be a reduction in the price charged by each firm. The price reduces because the entry of the third firm increases the market supply which in turn pulls the price downwards.

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