Smyth Industries operated as a monopolist for the past several years,earning annual profits amounting to $50 million,which it could have maintained if Jones Incorporated did not enter the market.The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually.The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit).One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year.The estimated impact of such a move is a loss of $1 billion.Ignoring antitrust concerns,is it in Smyth Industries' interest to remain as a duopolist or engage in predatory pricing?
A) Engage in predatory pricing since $210 million is greater than $200 million.
B) Remain as a duopolist since $210 million is greater than $0.
C) Engage in predatory pricing since $1.05 billion is greater than $1 billion.
D) Remain as a duopolist since $210 million is greater than $100 million.

Question

Quizplus · Accepted Answer

Remaining as a duopolist is more financially viable for Smyth Industries. If they continue earning $10 million annually without engaging in predatory pricing, they avoid the $1 billion loss. Over 20 years, they would earn $200 million ($10 million x 20 years), which is significantly better than incurring a $1 billion loss from predatory pricing, even if it potentially regains monopoly profits afterward.

Smyth Industries Operated as a Monopolist for the Past Several