SunCenter Is the Only Firm in Its Industry

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.