Sanford Inc.currently competes in a duopoly.The market price is $10,and Sanford's annual profit is $10 million.If Sanford were the only firm in the market,it could charge the monopoly price of $25 per unit and earn $35 million annually for an indefinite period of time.By charging $5 per unit for one year,Sanford could drive its rival out of the market and maintain a monopoly position indefinitely.However,this strategy will result in a $20 million loss since its marginal cost is $8 per unit.
a.What pricing strategy is the manager considering?
b.Ignoring legal considerations,is this pricing strategy profitable?
Assume the interest rate is 5 percent and,for simplicity,that any current period profits or losses occur immediately (at the beginning of the year).

Question

Sanford Inc.currently competes in a duopoly.The market price is $10,and Sanford's annual profit is $10 million.If Sanford were the only firm in the market,it could charge the monopoly price of $25 per unit and earn $35 million annually for an indefinite period of time.By charging $5 per unit for one year,Sanford could drive its rival out of the market and maintain a monopoly position indefinitely.However,this strategy will result in a $20 million loss since its marginal cost is $8 per unit.
a.What pricing strategy is the manager considering?
b.Ignoring legal considerations,is this pricing strategy profitable?
 Assume the interest rate is 5 percent and,for simplicity,that any current period profits or losses occur immediately (at the beginning of the year).

Quizplus · Accepted Answer

The Answer of Sanford Inc.currently competes in a duopoly.The market price is $10,and Sanford's annual profit is $10 million.If Sanford were the only firm in the market,it could charge the monopoly price of $25 per unit and earn $35 million annually for an indefinite period of time.By charging $5 per unit for one year,Sanford could drive its rival out of the market and maintain a monopoly position indefinitely.However,this strategy will result in a $20 million loss since its marginal cost is $8 per unit.
a.What pricing strategy is the manager considering?
b.Ignoring legal considerations,is this pricing strategy profitable?
 Assume the interest rate is 5 percent and,for simplicity,that any current period profits or losses occur immediately (at the beginning of the year).