ASSIGNMENT SUBMISSION FORM

Course Name: Economics of Strategy

Assignment Title: Judo Economics

Section: C

Submitted by: Group 33

Group Member PG ID
Name
Abhiram Reddy 61710454
Ashley Cousins 61719019
Nicolas Fiore 61719020
Rini Upadhyay 61710667
Vennela Gandikota 61710200
Vishal Gupta 61710454

1. Suppose that: (a) each buyer has a willingness-to-pay of $200 for one unit of either
the incumbents or the entrants product; and (b) both incumbent and entrant have a
$100 unit cost of serving buyers. Formulate a strategy for the entrant. How much
money can the entrant make?

Solution:

Let N be the number of customers captured by entrant.

Let P be the price of entrant.

Cost of serving buyers for entrant = $100

Profit of entrant = (P-100)*N ----------------------------------------------------------------- (1)

Now, if incumbent fights, it will keep its price just below the price of entrant. Taking the price of
incumbent equal to P,

Profit of incumbent if it fights = (P-100)*100 ----------------------------------------------- (2)

If incumbent accommodates the entrant, it will keep the price as $ 200.

Therefore, Profit of incumbent if it accommodates the entrant = (200-100)*(100-N) --- (3)

Now, for entrants strategy to be successful,

Profit of incumbent if it accommodates the entrant > Profit of incumbent if it fights

Making the two equations equal,

(P-100)*100 = (200-100)*(100-N)

N+P = 200
---------------------------------------------------------------------------------------------------
(4)

Now, entrant would want to maximize its profits. Therefore, Substituting (4) in (1),

(P -100) * (200-p) Maximize

Differentiating with respect to P and solving, we get P = 150

---------------------------------------------- (5)

Substituting (5) in (4), we get N = 50

------------------------------------------------------------------------------ (6)

Profit of entrant = 50 * 50 = $2500

2. Now suppose that: (a) each buyer has a willingness-to-pay of $200 for one unit of the
incumbents product and $160 for one unit of the entrants product, and (b) the
incumbent has a $100 unit cost and the entrant a $120 unit cots. Formulate a strategy
for the entrant. How much money can the entrant make?

Solution:

Let N be the number of customers captured by entrant.

Let P be the price of entrant.

Cost of serving buyers for entrant = $120

Cost of serving buyers for incumbent = $100

Profit of entrant = (P-120)*N ----------------------------------------------------------------- (1)

Now, if incumbent fights, it will keep its price comparable to the price of entrant. Since
willingness to pay of customers is $40 more for incumbent than for entrant, incumbent can
charge a price of (P + 40)

Profit of incumbent if it fights = (P + 40 - 100)*100 ----------------------------------------------- (2)

If incumbent accommodates the entrant, it will keep the price as $ 200.

Therefore, Profit of incumbent if it accommodates the entrant = (200-100)*(100-N) --- (3)

Now, for entrants strategy to be successful,

Profit of incumbent if it accommodates the entrant > Profit of incumbent if it fights

Making the two equations equal,

(P - 60)*100 = (200-100)*(100-N)

N+P = 160
---------------------------------------------------------------------------------------------------
(4)

Now, entrant would want to maximize its profits. Therefore, Substituting (4) in (1),

(P -120) * (160-p) Maximize

Differentiating with respect to P and solving, we get P = 140

---------------------------------------------- (5)

Substituting (5) in (4), we get N = 20

------------------------------------------------------------------------------ (6)

Profit of entrant = 20 * 20 = $400

3. Finally, suppose that: (a) each buyer has a willingness-to-pay of $200 for one unit of
either the incumbents or the entrants product; and (b) the incumbent has a $120 unit
cost and the entrant an $80 unit cost. Formulate a strategy for the entrant. How much
money can the entrant make this time?

Solution:

Let N be the number of customers captured by entrant.

Let P be the price of entrant.

Cost of serving buyers for entrant = $80

Cost of serving buyers for incumbent = $120

Profit of entrant = (P-80)*N ----------------------------------------------------------------- (1)

Now, if incumbent fights, it will keep its price just below the price of entrant. Taking the price of
incumbent equal to P
Profit of incumbent if it fights = (P - 120)*100 ----------------------------------------------- (2)

If incumbent accommodates the entrant, it will keep the price as $ 200.

Therefore, Profit of incumbent if it accommodates the entrant = (200-120)*(100-N) --- (3)

Now, for entrants strategy to be successful,

Profit of incumbent if it accommodates the entrant > Profit of incumbent if it fights

Making the two equations equal,

(P - 120)*100 = (200-120)*(100-N)

4N+5P = 1000
---------------------------------------------------------------------------------------------------
(4)

Now, entrant would want to maximize its profits. Therefore, Substituting (4) in (1),

(P -80) * [(1000 5P)/4] Maximize

Differentiating with respect to P and solving, we get P = 140

---------------------------------------------- (5)

Substituting (5) in (4), we get N = 75

------------------------------------------------------------------------------ (6)

Profit of entrant = 60 * 75 = $4500