SunCenter Is the Only Firm in Its Industry

question 16

Essay

SunCenter is the only firm in its industry. Currently, SunCenter charges $75 per unit, a price well in excess of its marginal cost of $5 per unit, and earns $70 million per year in profit. According to a trusted source, the manager of SunCenter learned that a new firm is contemplating entering the market. This would reduce its profit to $40 million per year. If SunCenter expanded its output and lowered its price to $50, the entrant would find it unprofitable to enter the market, and SunCenter would earn profits of $50 million per year for the indefinite future.
a. What pricing strategy is the manager of SunCenter considering?
b. If SunCenter was able to credibly commit to maintain a price of $50, would it be a profitable strategy? Explain.

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Definitions:

Systems Theory

An interdisciplinary theory that studies complex systems in nature, society, and science, analyzing how parts interrelate and how systems work over time.

Dominant

Having authority or power over others; prevalent in influence, strength, or number.

Error-Activated

A mechanism or process that is initiated when an error or mistake is detected, often leading to correction or adjustment.

Feedback

The process of giving and receiving information about performances or behaviors, aimed at improving future outcomes.