Firms in some industries with a small number of competitors earn normal economic profit. The Wall Street Journal (Lee Gomes, "Competition Lives On in Just One PC Sector," March 17, 2003, B1) reports that the computer graphics chips industry is one such market. Two chip manufacturers, NVIDIA and ATI, "both face the prospect of razor-thin profits, largely on account of the other's existence."
a. Consider the Bertrand model in which each firm has a positive fixed and sunk cost and a zero marginal cost. What are the Bertrand equilibrium prices? What are the Bertrand equilibrium profits?
b. Does this "razor-thin" profit result imply that the two manufacturers necessarily produce chips that are nearly perfect substitutes?
