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Homework answers / question archive / Consider the following capacity/entry deterrence problem

Consider the following capacity/entry deterrence problem. Suppose market demand is given by P = 90-Q. Firms have a constant marginal cost of 30. Of this cost, 20 is the cost of building capacity and 10 is the cost of production. Firm 1 is the incumbent and can choose to build capacity in the first stage. Both firms compete in Cournot competition in Stage 2. Both firms have a fixed cost of production F.

(a) What is the equilibrium strategy of Firm 1 when fixed cost F = 0?

(b) What about when F = 256?

(c) What about when F = 81?

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