So let's say without any threat of entry, without anything happening, we make a
level of profits that's up here. So these are my monopoly profits.
After period 1, after t1, there could be entry, maybe because a patent is running
out, maybe because a license comes up for sale.
Maybe because technologoy develops in a way such that from t2 onwards
another player can come into the market. So I now have 2 things I could do, I have
2 options. The first one is to block entry, so that
means I overinvest in capacity, I sign up people on long term contracts,
I overinvest in marketing, okay. This means
I engage in some costly strategic action that lowers my profits compared to
monopoly profits but its successful in keeping the entrant out.
The other option is to accommodate entry, in which case I don't change anything
about my behavior in period one and then after period two I just accept that
someone is going to come into my market. So the level of profit is going to be
high early on, and then it drops because I become a duopolist.
I have a second player in the market. I have a competitor in the market.