Consider two identical firms with no fixed costs and constant marginal cost c which compete in quantities in each of an infinite number of periods. The quantities chosen are observed by both firms before the next play begins. The inverse demand is given by p = 1 ? q1 ? q2, where q1 is the quantity produced by firm 1 and q2 is the quantity produced by firm 2. The firms use ‘trigger strategies’ and they revert to static Cournot behaviour if cooperation breaks down.

Derive the lowest value of the discount factor such that the firms can sustain the monopoly output level and discuss the economic reasoning behind your result.

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Deriving the Discount Factor for Sustaining Monopoly Output Heres how to derive the lowest discount factor for sustaining the monopoly output level in ... View the full answer