Suppose there are two firms competing in a Bertrand setting (simultaneous price setting) with identical products....

 

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Suppose there are two firms competing in a Bertrand setting (simultaneous price setting) with identical products. Suppose that they have the following profits under competition (N), collusion (M), and defection (D). = 0 = 2000 = 4000 The following formula can be used to determine the critical value of when the cartel will sustain itself: PR = D - D - N p represents the probability that the market interaction will continue in the subsequent period and R represents the discount factor on future profits. a. What is the intuition behind a higher p leading to a greater likelihood that the cartel will sustain itself? What is the intuition behind a higher R leading to a greater likelihood that the cartel will sustain itself? Briefly explain. b. How would a higher influence the probability of a cartel sustaining itself? Use the formula given above and also explain the intuition behind this result. Suppose there are two firms competing in a Bertrand setting (simultaneous price setting) with identical products. Suppose that they have the following profits under competition (N), collusion (M), and defection (D). = 0 = 2000 = 4000 The following formula can be used to determine the critical value of when the cartel will sustain itself: PR = D - D - N p represents the probability that the market interaction will continue in the subsequent period and R represents the discount factor on future profits. a. What is the intuition behind a higher p leading to a greater likelihood that the cartel will sustain itself? What is the intuition behind a higher R leading to a greater likelihood that the cartel will sustain itself? Briefly explain. b. How would a higher influence the probability of a cartel sustaining itself? Use the formula given above and also explain the intuition behind this result.

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Given N 0 M 2000 D 4000 Using the formula pR D M D N Wit... View the full answer