Consider the Bertrand duopoly discussed in class. Assume each firm has constant marginal cost c = 10
Question:
Consider the Bertrand duopoly discussed in class. Assume each firm has constant marginal cost c = 10 and zero fixed cost. Each firm chooses a price Pi 0. The market demand is given by Q = 130 P, where P = min{P1, P2} is the market price. Refer to the notes for more details on how payoffs are computed.
a) (2pts) If firm 1 is the only firm on the market, what price would this monopolist charge?
b) (2pts) In the Bertrand model with both firms on the market, if firm 2 chooses a price higher than the monopoly price, what is firm 1's best response?
c) (3pts) Use payoffs to explain why (P1 = 10, P2 = 10) is Nash equilibrium.
d) (3pts) Suppose both firms choose the monopoly price. How much profit would each firm make? Explain why it is not Nash equilibrium.
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba