Two firms produce digital cameras. Demand for these digital cameras is given by P = 100...

 

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Two firms produce digital cameras. Demand for these digital cameras is given by P = 100 - Q. Firm 1 has developed a proprietary technology that enables it to produce digital cameras at a constant marginal and average cost of $10 each. Firm 2 has an older technology that enables it to produce digital cameras at a constant marginal and average cost of $15 each. a) Assume the two firms compete in quantities (Cournot). (i) What are the equilibrium quantities, market price, and profits for each firm? (ii) Suppose firm 2 could develop a "copycat" technology with identical costs to firm 1 (MC = AC = 10). How much, if anything, should it be willing to spend to develop that technology? (iii) What is the social value of developing this "copycat" technology given Cournot competition? (Value = ΣAл + AСonsumer Surplus) b) Now assume the two firms compete in prices (undifferentiated Bertrand). (i) What are the equilibrium price, quantities, and firm profits if firm 1 uses its proprietary technology and firm 2 uses its old technology? (ii) Suppose firm 2 could develop a "copycat" technology with identical costs to firm 1 (MC = AC = 10). How much, if anything, should it be willing to spend to develop that technology? What is the social value of developing this "copycat" technology given Bertrand competition? (Value = A + AConsumer Surplus) (iii) (c) Both the social value and the incentives for firm 1 to develop its proprietary technology (MC=10), given that both firms were initially using the public technology (MC = 15), are larger under Bertrand competition than under Cournot competition. (Take this as a fact; you could derive the result if you had time!) How does this compare to your findings for the social value and firm 2's incentives to develop the “copycat". Two firms produce digital cameras. Demand for these digital cameras is given by P = 100 - Q. Firm 1 has developed a proprietary technology that enables it to produce digital cameras at a constant marginal and average cost of $10 each. Firm 2 has an older technology that enables it to produce digital cameras at a constant marginal and average cost of $15 each. a) Assume the two firms compete in quantities (Cournot). (i) What are the equilibrium quantities, market price, and profits for each firm? (ii) Suppose firm 2 could develop a "copycat" technology with identical costs to firm 1 (MC = AC = 10). How much, if anything, should it be willing to spend to develop that technology? (iii) What is the social value of developing this "copycat" technology given Cournot competition? (Value = ΣAл + AСonsumer Surplus) b) Now assume the two firms compete in prices (undifferentiated Bertrand). (i) What are the equilibrium price, quantities, and firm profits if firm 1 uses its proprietary technology and firm 2 uses its old technology? (ii) Suppose firm 2 could develop a "copycat" technology with identical costs to firm 1 (MC = AC = 10). How much, if anything, should it be willing to spend to develop that technology? What is the social value of developing this "copycat" technology given Bertrand competition? (Value = A + AConsumer Surplus) (iii) (c) Both the social value and the incentives for firm 1 to develop its proprietary technology (MC=10), given that both firms were initially using the public technology (MC = 15), are larger under Bertrand competition than under Cournot competition. (Take this as a fact; you could derive the result if you had time!) How does this compare to your findings for the social value and firm 2's incentives to develop the “copycat".

Answer rating: 100% (QA)

a Cournot competition i In Cournot competition each firm determines its quantity based on the expected reaction of the other firm To find the equilibrium quantities we can solve for the best response ... View the full answer