Question

1. Sue and Jane own two local gas stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute:

		a Sweezy oligopoly.
		a Cournot oligopoly.
		a Bertrand oligopoly.
		None of the answers is correct.

1. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million. If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever), then a Nash equilibrium when the interest rate is zero is:

		for each firm to not advertise until the rival does, and then to advertise forever.
		for your firm to never advertise.
		for your firm to always advertise when your rival does.
		for each firm to advertise until the rival does not advertise, and then not advertise forever.

The following provides information for a one-shot game.

    

What are the Nash equilibrium strategies for this game?

		(low price, low price)
		(high price, high price)
		(low price, low price) and (high price, high price)
		None of the answers is correct.

Answer 1

1. A Bertrand Oligopoly

In a Bertrand oligopoly model, when the products are homogenous, which is produced at the same marginal cost, each seller assume his/her rival’s output to be constant and make price level changes to get the market. This price competition leads to a situation where market price equals to marginal cost, where market function in a perfect competition and zero profits.

2. For each firm to not advertise until the rival does, and then to advertise forever.

Since you want to handover the business to your children and the interest rate is 0, you will not advertise till the rival does it, as you get a payoff $1 million when both firms don’t advertise. However if one firm advertise, in order to maximize the payoff other will also advertise, as they are doing this business in a long term view.

3. *There are no values given the game theory question. *

Nash equilibrium is the situation where both players don’t have an incentive to change their strategies further. Suppose the game is in the form as given below.

Then the Nash equilibrium will take place at (Low price, low price). Your quetion's values may differ.