Professor Binmore has a monopoly in the market for undergraduate game theory textbooks.The time-discounted value of Professor Binmore's future earnings is $4,000.Professor Ditt is considering writing a book to compete with Professor Binmore's book.With two books amicably splitting the market, the time-discounted value of each professor's future earnings would be $400.If there is full information (each professor knows the profits of the other), under what conditions could Professor Binmore deter the entry of Professor Ditt into his market?
A)Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that Professor Ditt would loose $8.In so doing, Professor Binmore would still make $410 over time.
B)Professor Binmore threatens to cut his price so that Professor Ditt would loose $800.In so doing, Professor Binmore would loose $80 over time.
C)Professor Binmore threatens to cut his price so that Professor Ditt would loose $80.In so doing, Professor Binmore would just break even over time.
D)Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that Professor Ditt would only make $8.In so doing, Professor Binmore would still make $200 over time.
E)None of the above.

Question

Quizplus · Accepted Answer

Professor Binmore's threat is credible because it would be in his best interest to carry it out if Professor Ditt entered the market. By cutting his price and attacking the credibility of Professor Ditt's book, Professor Binmore would make $410 over time, which is more than he would make if Professor Ditt entered the market and they split the profits evenly.

Professor Binmore Has a Monopoly in the Market for Undergraduate