asumming Two firms produce a homogeneous good and compete in prices. Consumers buy the good from the firm that charges the lower price. In case the price charged by the two firms is the same, the firms split the demand. The linear demand curve for the product is given by Q=100A−P. Bothfirmshavethe same constant marginal cost of 40. (a) [10] Plot the best response functions on the axes, recording p1 on the horizontal axis and p2 on the vertical axis. Label the two best response functions. Make sure that you explain what the prices in equilibrium (and profits) for the two firms are when they choose prices simultaneously and interact only once. Assume now that both firms choose simultaneously but interact an infinite number of times. Each firm discounts the future based on the discount factor 0 < δ < 1. (b) Show under which range of δ collusion is an equilibrium in this market. Explain the various steps. (c) Repeat the analysis in (b), but assuming now that the two firms compete in quantities rather than prices. In this case, what is the threshold of the discount factor beyond which collusion is profitable? Is collusion more likely under (b) or (c). Explain. Finally, assume that there is a Competition Authority (CA), which can investigate firms’ behaviour. Firms to make collusion binding choose to form a cartel. At the end of each period, with probability ϕ = 0.25, the CA engages in a careful investigation to discover any anticompetitive behaviour, applying a fine equal to F if firms are found guilty of cartel behaviour..
asumming Two firms produce a homogeneous good and compete in prices. Consumers buy the
good from the firm that charges the lower price. In case the price charged by the two firms
is the same, the firms split the demand. The linear demand curve for the product is given by
Q=100A−P. Bothfirmshavethe same constant marginal cost of 40.
(a) [10] Plot the best response functions on the axes, recording p1 on the horizontal axis
and p2 on the vertical axis. Label the two best response functions. Make sure that you
explain what the
choose prices simultaneously and interact only once.
Assume now that both firms choose simultaneously but interact an infinite number of times.
Each firm discounts the future based on the discount factor 0 < δ < 1.
(b) Show under which range of δ collusion is an equilibrium in this market. Explain
the various steps.
(c) Repeat the analysis in (b), but assuming now that the two firms compete in quantities
rather than prices. In this case, what is the threshold of the discount factor beyond
which collusion is profitable? Is collusion more likely under (b) or (c). Explain.
Finally, assume that there is a Competition Authority (CA), which can investigate firms’
behaviour. Firms to make collusion binding choose to form a cartel. At the end of each
period, with probability ϕ = 0.25, the CA engages in a careful investigation to discover
any anticompetitive behaviour, applying a fine equal to F if firms are found guilty of cartel
behaviour.
.
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