|Question||Financing a Strategic Investment under Quantity Competition: Suppose you own a firm that has invented a patented product that grants you monopoly power. Patents only last for a fixed period of time — as does the monopoly power associated with the patent. Suppose you are nearing the end of your patent and you have the choice of investing in research that will result in a patented technology that reduces the marginal cost of producing your product.
A: The demand for your product is linear and downward sloping and your current constant marginal cost is MC. There is one potential competitor who faces the same constant MC. Neither of you currently face any fixed costs, and the competitor observes your output before he decides whether and how much to produce.
(a) If this is the state of things when the patent runs out, will you change your output level? What happens to your profit?
(b) Suppose you can develop an improved production process that lowers your marginal cost to MC?