An industry consists of two firms. The demand function for the product of firm i is qi ( pi , p j ) = a - bpi + cpj .
The marginal cost of production for each firm is zero.
(a) Find the critical value of the discount factor that supports joint profit maximization with grim punishment strategies. [Hint: Let r = c/b, where 0 r 1.]
(b) How does the critical value of the discount factor depend on the degree of product dif- ferentiation r ? What does r = 1 imply about the relationship between the two goods? r = 0?