Consider two firms, A and B, which simultaneously set prices in every period. Firm A has marginal cost of cA = 6, while firm B has marginal cost of cB = 10. Assume no fixed cost. Market demand in each period is given by
Q (p) = 100 - 2p
Which price would firm A charge if it was a monopolist? Firm B?
What are the Bertrand equilibrium price, output, and profits?
Suppose the two firms start to collude in the following way: They agreed to play a Grim Trigger Strategy and charge firm B’s monopoly price. Calculate the critical discount factor.
Suppose the two firms were symmetric, i.e. they had the same marginal cost, cA = cB = 10. Would collusion become easier or harder to sustain?
Suppose now that they compete in quantities in a Cournot duopoly when cA = cB = 10. Calculate the critical discount factor.