Question

2. In the oligopoly market, only two companies A and B produce goods of the same quality. Each company is involved in producing goods.

The marginal cost and average cost are the same at 30. When the market demand function is Q=900-10P, answer the following questions

- Draw the balance with Bertrand, and describe the process in which Bertrand's balance was drawn.

-Draw the profits of each of the two companies in Bertrand's balance.

Answer 1

1.

Balance in the Bertrand occurs when both the firms price their product at the marginal cost. A simple to way to interpret this is, when a firm fixes price less than the other firm, the former gets the whole market share. But in this case when price equals marginal cost, none of the firms will be willing to price below MC because they will incur losses although they gain the whole market share. So, equilibrium price level equals MC, both the firms have equal market share and the bertrand balance is achieved. Diagram is shown below to interpret this scenario.

p1^N and p2^Nis the equilibrium price and equals MC.

So, going by this p1 = p2 = 30

Market demand = Q = 900 - 300 = 600

2.

Q=q1 + q2

For firm 1:

Profits = Total revenue - Total costs

= pq1 - (Average costs×q1)

=q1×(p - average cost)

=0 {since p=MC= average cost)

Similarly profit is 0 for firm 2 as well.

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