Suppose instead that the firms in Problem 9 compete by setting quantities rather than prices. All other facts are the same. It is possible to rewrite the original demand equations as P1 [ 150 ( 2/ 3) Q2] ( 4/ 3) Q1 and P2 [ 150 ( 2/ 3) Q1] ( 4/ 3) Q2. In words, increases in the competitor s output lowers the intercept of the firm s demand curve. a. Set MR1 MC to confirm that firm 1 s optimal quantity depends on Q2 according to Q1 45 .25Q
2. Explain why an increase in one firm s output tends to deter production by the other.
b. In equilibrium, the firms set identical quantities: Q1
Q2. Find the firms equilibrium quantities, prices, and profits.
c. Compare the firms profits under quantity competition and price competition ( Problem 9). Provide an intuitive explanation for why price competition is more intense ( i. e., leads to lower equilibrium profits).