(a) [15 marks] Consider two identical firms with no fixed costs and constant marginal cost c...

(a) [15 marks] Consider two identical firms with no fixed costs and constant marginal
cost c which compete in quantities in each of an infinite number of periods. The
quantities chosen are observed by both firms before the next round of play begins.
The inverse demand is given by p = 1 − q1 − q2, where q1 is the quantity produced by
firm 1 and q2 is the quantity produced by firm 2. The firms use ‘trigger strategies’ and
they revert to static Cournot behaviour if cooperation breaks down. Derive the lowest
value of the discount factor such that the firms can sustain the monopoly output level
and discuss the economic reasoning behind your result.

Expert Solution

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Rahul Sunny answered 2 years ago

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