Question

In: Economics

In the Bertrand duopoly, market demand is Q = a-Bp, and firms have no fixed costs...

In the Bertrand duopoly, market demand is Q = a-Bp, and firms have no fixed costs and identical marginal cost. Find a Bertrand equilibrium pair of prices, (p1 , p2 ), and quantities, (q1, q2), when the following hold. a. Firm1 has fixed costs F>0. b. Both firms have fixed costs F > 0. c. Fixed costs are zero, but firm 1 has lower marginal cost than firm 2, so c2 > c1 > 0. (For this one, assume the low-cost firm captures the entire market demand whenever the firms charge equal prices.).

Solutions

Expert Solution

As per the question:

Bertand model is equivalent with Cournot model, while the choice variable is price in the Bertrand model. These models produce different examples of a Nash equilibrium and this is different as according to monopoly case. If the firm whether uses output or price as its strategic variable.They mostly used Bertand model.

market demand is Q = a-Bp, and firms have no fixed costs and identical marginal cost. Find a Bertrand equilibrium pair of prices, (p1 , p2 ), and quantities, (q1, q2), when the following hold. a. Firm1 has fixed costs F>0. b. Both firms have fixed costs F > 0. c. Fixed costs are zero, but firm 1 has lower marginal cost than firm 2, so c2 > c1 > 0

a linear inverse demand function, p = a – Bp, where Q = q1 + q2 and the parameters a and b are positive.1 Each owner then sets output to maximize its profits, and the equilibrium price clears the market (p*).

TheBertandt problem is to determine the optimal values of our variables of interest: q1, q2, p1, and p2. Notice that because the products are homogeneous, however, that p1 =

p2 = p* in equilibrium if both firms are to participate.Recall that for this to be a game, we must define the players, their choice variables, their payoffs, and the information set. For the remainder of this chapter, we will assume that assume that costs are positive and the firm i’s total cost equation is TCi = cqi, c > 0. In terms of

notation, c is the unit cost of production, subscript i signifies firm 1 or 2, and subscript j signifies

the other firm. Each firm’s goal is to choose the level of output that maximizes profits, given the

output of the other firm. The relevant characteristics of the game are:

· Players: Firms or owners 1 and 2.

Let p1 = p(q1) and p2 = p(q2) be

the prices at the optimal quantities. Then, by optimization:

p1q1 ? c1(q1) _ p2q2 ? c1(q2),

because profits at (p1, q1) must be larger than any other price/quantity combo including

(p2, q2). Similarly:

p1q1 ? c2(q1) _ p2q2 ? c2(q2).

Subtracting these equations, we get:

c2(q1) ? c1(q1) _ c2(q2) ? c1(q2).

Or,

c2(q1) ? c2(q2) ? (c1(q1) ? c1(q2)) _ 0.

Which can be written: Z q1

q2

c02(x)dx ? Z q1 q2

c01(x)dx _ 0.

Z q1 q2

[c02(x) ? c01(x)]

| _0 b{yzass. }

dx _ 0.

Hence if q2 > q1, the area would have to be negative which would violate this last

condition. Thus q2 _ q1 as required.


Related Solutions

In the Bertrand duopoly, market demand is Q = a-Bp, and firms have no fixed costs...
In the Bertrand duopoly, market demand is Q = a-Bp, and firms have no fixed costs and identical marginal cost. Find a Bertrand equilibrium pair of prices, (p1 , p2 ), and quantities, (q1, q2), when the following hold. a. Firm1 has fixed costs F>0. b. Both firms have fixed costs F > 0. c. Fixed costs are zero, but firm 1 has lower marginal cost than firm 2, so c2 > c1 > 0. (For this one, assume the...
In the Bertrand duopoly, market demand is Q = ? ? Bp, and firms have no...
In the Bertrand duopoly, market demand is Q = ? ? Bp, and firms have no fixed costs and identical marginal cost. Find a Bertrand equilibrium pair of prices, (p1 , p2 ), and quantities, (q1, q2), when the following hold. a. Firm1 has fixed costs F>0. b. Both firms have fixed costs F > 0. c. Fixed costs are zero, but firm 1 has lower marginal cost than firm 2, so c2 > c1 > 0. (For this one,...
Firms A and B are Bertrand duopolists facing market demand, P = 300-Q, where Q =...
Firms A and B are Bertrand duopolists facing market demand, P = 300-Q, where Q = QA+QB, and marginal cost, MC = 68. a)What level of output will each firm will produce? b)What price will each charge? c)Why is this outcome a Nash equilibrium?
Duopoly quantity-setting firms face the market demand: P = 300–Q where Q = Q1 + Q2....
Duopoly quantity-setting firms face the market demand: P = 300–Q where Q = Q1 + Q2. Each firm has a marginal cost of $30 per unit and zero fixed costs. (a) What are the quantities chosen by each firm in the Cournot equilibrium? What is the market price? (b) What are the quantities chosen by each firm in the Stackelberg equilibrium, when Firm 1 moves first? What is the market price? How does this market price compare to the market...
Recall the static Bertrand duopoly model (with homogenous products): the firms name prices simultaneously; demand for...
Recall the static Bertrand duopoly model (with homogenous products): the firms name prices simultaneously; demand for firm i's product is a - pi if pi < pj, is 0 if pi > pj, and is (a-pi)/2 if pi = pj; marginal costs are c < a. Consider the infinitely repeated game based on this stage game. Show that the firms can use trigger strategies (that switch forever to the stage-game Nash equilibrium after any deviation) to sustain the monopoly price...
a.) Two identical firms compete as a Cournot duopoly. The market demand is P=100-2Q, where Q...
a.) Two identical firms compete as a Cournot duopoly. The market demand is P=100-2Q, where Q stands for the combined output of the two firms, Q=q1 +q2. The marginal cost for each firm is 4. Derive the best-response functions for these firms expressing what q1 and q2 should be. b.) Continuing from the previous question, identify the price and quantity that will prevail in the Cournot duopoly market c.) Now suppose two identical firms compete as a Bertrand duopoly. The...
The inverse market demand curve for a duopoly market is p=14-Q=14-q₁-q₂, where Q is the market...
The inverse market demand curve for a duopoly market is p=14-Q=14-q₁-q₂, where Q is the market output, and q₁ and q₂ are the outputs of Firms 1 and 2, respectively. Each firm has a constant marginal cost of 2 and a fixed cost of 4. Consequently, the Nash-Cournot best response curve for Firm 1 is q₁=6-q₂/2. A. Create a spreadsheet with Columns titled q₂, BR₁, Q, p, and Profit₁. In the first column, list possible quantities for Firm 2, q₂,...
1. Duopoly quantity-setting firms face the market demand: P = 600–(1/2)Q where Q = Q1 +...
1. Duopoly quantity-setting firms face the market demand: P = 600–(1/2)Q where Q = Q1 + Q2. Each firm has a marginal cost of $60 per unit and zero fixed costs. (a) What are the quantities chosen by each firm in the Cournot equilibrium? What is the market price? (b) What are the quantities chosen by each firm in the Stackelberg equilibrium, when Firm 1 moves first? What is the market price? How does this market price compare to the...
Two identical firms compete in a Bertrand duopoly. The firms produce identical products at the same...
Two identical firms compete in a Bertrand duopoly. The firms produce identical products at the same constant marginal cost of MC = $10. There are 2000 identical consumers, each with the same reservation price of $30 for a single unit of the product (and $0 for any additional units). Under all of the standard assumptions made for the Bertrand model, the equilibrium prices would be Group of answer choices $10 for both firms $30 for both firms $50 for both...
Consider Bertrand Competition with demand curve P = 56 − 2 Q. There are two firms....
Consider Bertrand Competition with demand curve P = 56 − 2 Q. There are two firms. Firm 1 has MC=12. Firm 2 has MC=8. What is the equilibrium number of units transacted in this market (Round to the nearest integer)?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT