Two firms, 1 and 2, compete in price Market demand in period t is given by D(t) = AtD(p) with A > 0 The common discount factor is ? ? (0, 1)Suppose the firms use trigger strategies to collude at the monopoly price pm = arg max(p ? c)(A)tD(p) ? (A)t?m (note that pm does not depend on A and t due to the function form) Suppose the punishment after deviation is returning to marginal cost pricing forever If the firms collude, they set the same prices and evenly split the profitsWhat are firms’ collusive profits in period t?If a firm undercuts below pm in period t, what are the (optimal)deviating price and deviating profitWrite down the no-deviating condition in period t?Simplify the no-deviating condition and derive the critical discount factor ?Compared to when the market is shrinking (A < 1), does a expanding market (A > 1) make collusion easier?Explain in words your finding in [e]

Given,The market consists of two firms, 1 and 2.The colluding firms are following monopoly price.The…

Answered: Two firms, 1 and 2, compete in price…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Two firms, 1 and 2, compete in price Market demand in period t is given by D(t) = AtD(p) with A > 0 The common discount factor is ? ? (0, 1)

Suppose the firms use trigger strategies to collude at the monopoly price pm = arg max(p ? c)(A)tD(p) ? (A)t?m (note that pm does not depend on A and t due to the function form) Suppose the punishment after deviation is returning to marginal cost pricing forever If the firms collude, they set the same prices and evenly split the profits

What are firms’ collusive profits in period t?
If a firm undercuts below pm in period t, what are the (optimal)
deviating price and deviating profit
Write down the no-deviating condition in period t?
Simplify the no-deviating condition and derive the critical discount factor ?
Compared to when the market is shrinking (A < 1), does a expanding market (A > 1) make collusion easier?
Explain in words your finding in [e]

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