a) What is more in your company's interest to compete or cooperate with the rival company? Keep in mind that explicit collusion agreements are illegal, so each company must decide on its own whether or not to cooperate with its rival. (b) What risks would your company take if you decided to choose a level of production that indicated that you wanted to collude with the rival company? (c) If it were decided to compete, what would you suggest: compete on prices or compete on quantities? d) In the event that you decide to compete in quantities, what would your company be most interested in: - being the first to announce your production level or - waiting to see what level of production the rival company chooses?
Exercise A.9
In a market only two firms produce a homogeneous good. You work on one of them and are tasked with drawing up the production strategy for the coming year.
The two companies in the market have the same information and the objective of both is the maximization of their profit.
You know:
- the inverse market demand curve of the good: P(Q)=200-2Q where Q = q₁ + q₂ ,
- the function that represents the costs of your company and the rival company: C(qᵢ) = 20qᵢ (for i=1, 2), and
- the data in the following table, with the optimal decisions according to the different types of competition:C(qᵢ) = 20qᵢ and the data in the following table, with the optimal decisions according to the different types of competition:
-
q1
q2
P
Bertrand
45
45
20
Cournot
30
30
80
Collusion
22,5
22,5
110
a) What is more in your company's interest to compete or cooperate with the rival company? Keep in mind that explicit collusion agreements are illegal, so each company must decide on its own whether or not to cooperate with its rival.
(b) What risks would your company take if you decided to choose a level of production that indicated that you wanted to collude with the rival company?
(c) If it were decided to compete, what would you suggest: compete on prices or compete on quantities?
d) In the event that you decide to compete in quantities, what would your company be most interested in:
- being the first to announce your production level or
- waiting to see what level of production the rival company chooses?
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