Prompt: The inverse market demand for mineral water is P = 200 - 10Q,where Q is total market output and P is the market price. Two firms have complete control of the supply of mineral water and both have zero costs.
Calculate the DWL from Cournot oligopoly.
Denote the Cournot quantity for each firm by qa, and denote half of the monopoly quantity by qb. Suppose that the two firms interact with each other for infinite periods, and in each period they choose quantities simultaneously.Consider the following collusive strategy, the same as discussed in class: produce qb only if no one has cheated so far, and produce qa forever if some has cheated before. Assume each firm acts to maximize its sum of discounted profits where the interest rate is r. For what values of r can such collusion be sustained?