- Bertrand Competition
Two firms are competing simultaneously in their prices. The aggregate market demand is p = 20 - 4Q. The marginal cost is the same for both firms and is c = 5 (5 points). There are no fixed costs.
a) Characterize the best response functions for both firms. Draw the graph of both firms' best response functions and characterize the Bertrand Equilibrium .
b) Now suppose the firm 2 gets inefficient in its production so that the firm 2's marginal cost becomes c2 = 10, the firm 1's marginal cost is the same as before,c1 = 5. Draw the graph of the firms' best response functions and characterize the Bertrand Equilibrium .
c) Instead suppose the firm 2 gets even more inefficient in its production so that the firm 2's marginal cost becomes c2 = 15, the firm 1's marginal cost is the same as before, c1 = 5. Draw the graph of the firms' best response functions and characterize the Bertrand Equilibrium .