Question: Exercise 3 - Collusion, punsishment and side payments Consider a duopoly market with inverse demand given by [ P = 1 8 0 -

Exercise 3- Collusion, punsishment and side payments
Consider a duopoly market with inverse demand given by
\[
P=180-3 Q
\]
Firm 1 has marginal cost of 12 and firm 2 has marginal cost of 36. There are no fixed costs. Both firms adopt a trigger strategy. The punishment price for firm 1 is a price slightly below the marginal cost of firm 2. The punishment price of firm 2 is its own marginal cost. It is assumed that firms produce an equal share of the output when the collusive price is being charged.
a What price would firm 1 charge if it was the monopolist in this market? What price would firm 2 charge if it was the monopolist in this market?
b Suppose the collusive price is equal to \( P=108\). For which values of the discount factor \(\delta \) does the trigger strategy described above constitute a subgame-perfect Nash equilibrium?
c Suppose the collusive price is equal to \( P=96\). For which values of the discount factor \(\delta \) does the trigger strategy described above constitute a subgame-perfect Nash equilibrium?
d Given your answers to \( b \)) and \( c \)), for which collusive price is the cartel more stable: \( P=108\) or \( P=96\)?
e Now assume that, as in question \( b \)), the collusive price is set at \( P=108\). Which minimal side payment \( A \) should firm 2 make to firm 1 in order for the cartel to be stable for all discount factors \(\delta \geq 0.625\)?
Exercise 3 - Collusion, punsishment and side

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