Consider two firms with a homogeneous product who face the market demand function p = 2 – q1 – 42, where q; and p are the quantities and price. Their constant marginal costs are given by c = 1. The firms compete in quantities in a simultaneous move game. Use this specific example (not a general case) to show that the Nash equilibrium is not Pareto efficient, and the cooperative solution is not an equilibrium (in the sense that both firms have an incentive to cheat). In your answer, use the fact that the firms are identical. Namely, they produce equal amounts (both in the simultaneous move game and in the cooperative case).
Consider two firms with a homogeneous product who face the market demand function p = 2 – q1 – 42, where q; and p are the quantities and price. Their constant marginal costs are given by c = 1. The firms compete in quantities in a simultaneous move game. Use this specific example (not a general case) to show that the Nash equilibrium is not Pareto efficient, and the cooperative solution is not an equilibrium (in the sense that both firms have an incentive to cheat). In your answer, use the fact that the firms are identical. Namely, they produce equal amounts (both in the simultaneous move game and in the cooperative case).
Chapter15: Oligopoly And Strategic Behavior
Section: Chapter Questions
Problem 14P
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