Answer :
If there is an incumbent monopoly and a potential entrant, and the entrant does not know whether the incumbent is a high-cost or low-cost producer, the incumbent may have an incentive to set prices above the price that would be their profit-maximizing price in the monopoly context.
Let's understand the concept of incumbent monopoly and potential entrantAn incumbent monopoly is the state of the market where a single company is the only player that is dominating the market by being the sole provider of a certain product or service. On the other hand, a potential entrant is a company that intends to enter the market. This entrant can be a company that offers the same product or service as the incumbent monopoly, or it can be a company that offers a similar product or service.
If the incumbent monopoly has more information than the potential entrant, the incumbent monopoly may have an incentive to set prices above the price that would be their profit-maximizing price in the monopoly context.The reason for this is that by setting higher prices, the incumbent monopoly may be able to deter the potential entrant from entering the market. If the potential entrant does not know whether the incumbent is a high-cost or low-cost producer, the entrant may not be able to compete with the incumbent monopoly on price.
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