4) Suppose there are two firms that compete in prices, say firms 1 and 2, but that the firms produce differentiated products. Suppose that the demand for firm 1 is 91 (P₁, P2) 10-2p₁ + P2 and the demand for firm 2 is q2 (P2, P₁) = 10 - 2p2 + P₁. Also, assume that firm 1 has a constant marginal cost of C₁ = 2 and firm 2 has a constant marginal cost of C₂ = 3. - a) What are the reaction functions for both firms? b) Solve for the Bertrand equilibrium in prices. c) Now, suppose firms 1 and 2 agree to merge. However, under the merger only firm 1 will operate and firms 1 and 2 will split the resulting profits equally. Will both firms agree to such a plan or do they prefer the Bertrand outcome?
4) Suppose there are two firms that compete in prices, say firms 1 and 2, but that the firms produce differentiated products. Suppose that the demand for firm 1 is 91 (P₁, P2) 10-2p₁ + P2 and the demand for firm 2 is q2 (P2, P₁) = 10 - 2p2 + P₁. Also, assume that firm 1 has a constant marginal cost of C₁ = 2 and firm 2 has a constant marginal cost of C₂ = 3. - a) What are the reaction functions for both firms? b) Solve for the Bertrand equilibrium in prices. c) Now, suppose firms 1 and 2 agree to merge. However, under the merger only firm 1 will operate and firms 1 and 2 will split the resulting profits equally. Will both firms agree to such a plan or do they prefer the Bertrand outcome?
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.4P
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![4) Suppose there are two firms that compete in prices, say firms 1 and 2, but that the
firms produce differentiated products. Suppose that the demand for firm 1 is
9₁(P₁, P2) = 10 - 2p₁ + P₂ and the demand for firm 2 is q2 (P2, P₁) = 10 - 2p₂ + P₁.
Also, assume that firm 1 has a constant marginal cost of c₁ = 2 and firm 2 has a constant
marginal cost of c₂ = 3.
a) What are the reaction functions for both firms?
Solve for the Bertrand equilibrium in prices.
b)
c) Now, suppose firms 1 and 2 agree to merge. However, under the merger only
firm 1 will operate and firms 1 and 2 will split the resulting profits equally. Will
both firms agree to such a plan or do they prefer the Bertrand outcome?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9e2597a6-f559-4086-95a9-d32d556d6ca5%2F31f6db49-2f62-4846-9120-02f566e937ea%2Fxwdpjpk_processed.jpeg&w=3840&q=75)
Transcribed Image Text:4) Suppose there are two firms that compete in prices, say firms 1 and 2, but that the
firms produce differentiated products. Suppose that the demand for firm 1 is
9₁(P₁, P2) = 10 - 2p₁ + P₂ and the demand for firm 2 is q2 (P2, P₁) = 10 - 2p₂ + P₁.
Also, assume that firm 1 has a constant marginal cost of c₁ = 2 and firm 2 has a constant
marginal cost of c₂ = 3.
a) What are the reaction functions for both firms?
Solve for the Bertrand equilibrium in prices.
b)
c) Now, suppose firms 1 and 2 agree to merge. However, under the merger only
firm 1 will operate and firms 1 and 2 will split the resulting profits equally. Will
both firms agree to such a plan or do they prefer the Bertrand outcome?
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