Question

Imagine British Telecom is the monopolist for landline phone calls in the UK. Every day, 50,000 minutes of phone calls are sold throughout the UK. British Telecom charges GBP 6 per minute.

Now a small company called London Calls enters the market. London Calls charges GBP 4 per minute and limits its network to the Greater London area where 50% of the UK's overall minutes of phone calls are sold. London Calls can convince British Telecom that it will not extend its network further.
Assume that the quality of the phone calls is the same for British Telecom and London Calls. All consumers will switch to the supplier with the lower prices. There are no switching costs. The companies cannot charge different prices for different regions.
Will British Telecom attack London Calls?

Answer 1

British Telecom is likely to respond to the competition from London Calls, potentially by lowering prices or improving service quality.

Step-by-step explanation:

In this scenario, British Telecom is the monopolist for landline phone calls in the UK, charging GBP 6 per minute. London Calls enters the market as a small company charging GBP 4 per minute and limiting its network to the Greater London area. Since all consumers will switch to the supplier with the lower prices, it is likely that British Telecom will respond to the competition from London Calls.

One possible response from British Telecom could be to lower their prices to match or undercut London Calls. This way, British Telecom can retain their customers and potentially force London Calls out of the market due to their lower economies of scale.

Another possible response could be for British Telecom to improve their service quality or offer additional features to differentiate themselves from London Calls. This could help British Telecom retain customers who value these factors more than pricing.