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Suppose three identical firms engage in Cournot competition, with identical marginal costs of c. Inverse market demand is given by the function P = a - bQ, where Q=q1 + q2+q3. a) Assume the firms collude to maximize total profit. What quantity does each firm produce and what is their individual profit? (assume firms equally split production and profits from the collusive profit maximization problem) b) One firm considers reneging on the collusion production agreement in part (a). What is the maximum profit achievable with this deviation from the collusive agreement? c) Assuming the oligopoly game is infinitely repeated, what discount factor is necessary to sustain cooperation if a Cournot equilibrium trigger strategy is threatened as punishment? d) Does the discount factor depend on the marginal cost (c) for each firm? Explain why or why not.

Suppose three identical firms engage in Cournot competition, with identical marginal costs of c. Inverse market demand is given by the function P = a - bQ, where Q=q1 + q2+q3. a) Assume the firms collude to maximize total profit. What quantity does each firm produce and what is their individual profit? (assume firms equally split production and profits from the collusive profit maximization problem) b) One firm considers reneging on the collusion production agreement in part (a). What is the maximum profit achievable with this deviation from the collusive agreement? c) Assuming the oligopoly game is infinitely repeated, what discount factor is necessary to sustain cooperation if a Cournot equilibrium trigger strategy is threatened as punishment? d) Does the discount factor depend on the marginal cost (c) for each firm? Explain why or why not.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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• Suppose three identical firms engage in Cournot competition, with identical marginal costs of c. Inverse market demand is given by the function P a – bQ, where Q q1 +q2 + q3. a) produce and what is their individual profit? (assume firms equally split production and profits from the collusive profit maximization problem) Assume the firms collude to maximize total profit. What quantity does each firm b) What is the maximum profit achievable with this deviation from the collusive agreement? One firm considers reneging on the collusion production agreement in part (a). c) necessary to sustain cooperation if a Cournot equilibrium trigger strategy is threatened as punishment? Assuming the oligopoly game is infinitely repeated, what discount factor 8 is d) why or why not. Does the discount factor depend on the marginal cost (c) for each firm? Explain
Transcribed Image Text:• Suppose three identical firms engage in Cournot competition, with identical marginal costs of c. Inverse market demand is given by the function P a – bQ, where Q q1 +q2 + q3. a) produce and what is their individual profit? (assume firms equally split production and profits from the collusive profit maximization problem) Assume the firms collude to maximize total profit. What quantity does each firm b) What is the maximum profit achievable with this deviation from the collusive agreement? One firm considers reneging on the collusion production agreement in part (a). c) necessary to sustain cooperation if a Cournot equilibrium trigger strategy is threatened as punishment? Assuming the oligopoly game is infinitely repeated, what discount factor 8 is d) why or why not. Does the discount factor depend on the marginal cost (c) for each firm? Explain
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