In: Economics
BER company and Nord Center are competitors in the market for gadgets. The demand conditions in this market are given by the equation Q=1000-P, and both companies can supply the market with gadgets at a constant marginal cost equal to five dollars (they incur no other costs to run their enterprises).
a. Describe in detail what conditions will give rise to price competition between BER and Nord Center. Given that they compete by choosing prices, what is the equilibrium price and quantity in the market for gadgets?
b. Would the outcome above change if BER (and not Nord Center) instead had a constant marginal cost equal to four dollars rather than five? If so, what is the new equilibrium?
Q=1000-P , MC=5
a) The following assumptions must hold:
Given that they compete by choosing prices, the equilibrium will be at
P1 = P2= MC =5
Note: this is the only possible equilibrium because: suppose P1 P2
Now, Q=1000-P
Q= 1000-5 = 995
So, P1=P2=5, Q=995, Q1= Q2 = 995/2= 497.5
b) now , MC1 of BER= 4, MC2 of Nord Center=5
Here, the outcome would change due to different marginal costs.
Note ,
Here, firm 1 has lower price so it will get the whole market and firm 2 will get zero profits. But firm 1 here also get zero profits as P=MC=4, clearly firm 1 can deviate to a higher price and get positive profits , so this cannot be an equilibrium.