Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests a predatory pricing scheme, i.e., pricing its product 50% below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion for that year, and the relevant interest rate is 5%. Ignoring antitrust concerns, please answer the following questions:
a. What is the present value of Smyth Industries' profits if it could have remained a monopoly?
b. What is the present value of Smyth Industries' profits if it remains a duopolist?
c. If Smyth Industries adopts the manager’s suggested predatory pricing scheme, what is the present value of its current and future profits?
d. Is it in Smyth Industries’ interest to remain as a duopolist or engage in the predatory pricing scheme? Explain.
