Question

Show how a manager can profitably lessen competition by raising rivals' costs.

Short answer

The manager can raise rival costs by increasing their marginal cost, fixing or implementing foreclosure or price-cost squeezing strategies

Step-by-step solution

Consequences of raising rival’s cost

Raising the cost of the rivals, the manager can distort their incentives to decide, thus influencing their prices, output, and the decision to enter the market. If implementing such action requires a small cost, then the manager will accept such strategies to increase their profits at the expense of other firms.

Strategies Implemented

1. Involving marginal cost:

Let firm 1 uses business tactics to increase the marginal cost of the rival firm 2. Thus, the rival firm will now produce less output, and the price will increase in the market. On the other hand, firm 1 takes advantage and increases its output, thus increasing its market share and profits.

1. Involving fixed cost:

Suppose firm one lobby for regulation that adopts a license to operate in the market whose cost is greater than the fixed cost of the entrant. Thus, changing the incentives of the possible entrant. Hence, firm one will continue to control the market without any interference.

1. Involving vertically integrated firm:

Through the process of vertical foreclosure, the firm refuses to sell inputs to the downstream firms. Thus, it forces them to go for inefficient substitutes, which increases their cost of production, forcing the rivals to exit the market.

The price-cost squeeze strategy followed by the firm induces the firm to increase the input costs of the rivals. Thus, it keeps the output price constant, which drives them out of the market as their cost is greater than the revenue generated from the market.