Firm 1 and firm 2 compete with each other by choosing quantities. The market
1. Assume the game lasts only one period. Compute the
2. If firm 1 becomes the monopolist on this market, what quantities will firm 1 choose to produce? Denote this quantity as QM. 3. One possible strategy is that each firm produces QM
2 . Would the resulting outcome be better for both firms (Pareto improvement)? Explain why this is not the equilibrium in the one period game. 4. Assume this game is infinitely repeated and the interest rate in this economy is r. For what values of r the strategy in (3) is sustainable by using a “Grim Trigger” strategy?
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