2. Consider an industry with two firms producing an identical product. Let 9₁ be the output for firm 1, q2 for firm 2, and Q = 9₁ +92. In each period, market demand is given by P 40-Q and the firms compete à la Cournot. There is a sequence of infinitely many periods. Both firms have cost function of c(q) = 5q, and discount future profits with discount factor ß € [0, 1). (1) If both firms form a cartel, what are the quantity and profit of each firm? (2) Suppose that the collusive firms adopt a trigger strategy. That is, each firm competes in Cournot fashion if any deviation from collusive q has been observed. If 3 = 0, what is firm 1's best response to firm 2 playing the cartel quantity? (3) Explain how your answer to part (2) changes as 3 increases. Find the threshold of B, below which the cartel is not sustainable.
2. Consider an industry with two firms producing an identical product. Let 9₁ be the output for firm 1, q2 for firm 2, and Q = 9₁ +92. In each period, market demand is given by P 40-Q and the firms compete à la Cournot. There is a sequence of infinitely many periods. Both firms have cost function of c(q) = 5q, and discount future profits with discount factor ß € [0, 1). (1) If both firms form a cartel, what are the quantity and profit of each firm? (2) Suppose that the collusive firms adopt a trigger strategy. That is, each firm competes in Cournot fashion if any deviation from collusive q has been observed. If 3 = 0, what is firm 1's best response to firm 2 playing the cartel quantity? (3) Explain how your answer to part (2) changes as 3 increases. Find the threshold of B, below which the cartel is not sustainable.
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter12: Price And Output Determination: Oligopoly
Section: Chapter Questions
Problem 1E
Related questions
Question
![2. Consider an industry with two firms producing an identical product. Let q₁ be the
output for firm 1, 92 for firm 2, and Q = 91 +92. In each period, market demand
is given by P 40 Q and the firms compete à la Cournot. There is a sequence
of infinitely many periods. Both firms have cost function of c(q) = 5q, and discount
future profits with discount factor ß = [0, 1).
=
(1) If both firms form a cartel, what are the quantity and profit of each firm?
(2) Suppose that the collusive firms adopt a trigger strategy. That is, each firm
competes in Cournot fashion if any deviation from collusive q has been observed.
If ß = 0, what is firm 1's best response to firm 2 playing the cartel quantity?
(3) Explain how your answer to part (2) changes as 3 increases. Find the threshold
of B, below which the cartel is not sustainable.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7c47eb58-11c8-4f3d-a446-35857f47e26f%2F20f93d5a-3cd4-4b8c-a42f-d7494aea366c%2Folsb2xjb_processed.jpeg&w=3840&q=75)
Transcribed Image Text:2. Consider an industry with two firms producing an identical product. Let q₁ be the
output for firm 1, 92 for firm 2, and Q = 91 +92. In each period, market demand
is given by P 40 Q and the firms compete à la Cournot. There is a sequence
of infinitely many periods. Both firms have cost function of c(q) = 5q, and discount
future profits with discount factor ß = [0, 1).
=
(1) If both firms form a cartel, what are the quantity and profit of each firm?
(2) Suppose that the collusive firms adopt a trigger strategy. That is, each firm
competes in Cournot fashion if any deviation from collusive q has been observed.
If ß = 0, what is firm 1's best response to firm 2 playing the cartel quantity?
(3) Explain how your answer to part (2) changes as 3 increases. Find the threshold
of B, below which the cartel is not sustainable.
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