1. Bertrand's original analysis predicted a perfectly competitive price and output if there were more than one firm in a market. Assume firms A and B are Bertrand competitors making identical products at identical cost C; = 200qi and facing inverse market demane P= 1200 – 0.1Q. Assume further that there are no capacity constraints, and that if the firms charge the same price, consumers split their purchases evenly between the firms. a. Assume A and B choose prices repeatedly and simultaneously, and that both adopt the Trigger strategy. Determine whether joint-profit maximizing is a sustainable equilibrium if the interest rate is 5% and there is a 40% probability of significant entry into the market that would eliminate future monopoly profits. b. How would your analysis change if there were four identical Bertrand competitors rather than two? Why?

1. Bertrand's original analysis predicted a perfectly competitive price and output if there were more than one firm in a market. Assume firms A and B are Bertrand competitors making identical products at identical cost C; = 200qi and facing inverse market demane P= 1200 – 0.1Q. Assume further that there are no capacity constraints, and that if the firms charge the same price, consumers split their purchases evenly between the firms. a. Assume A and B choose prices repeatedly and simultaneously, and that both adopt the Trigger strategy. Determine whether joint-profit maximizing is a sustainable equilibrium if the interest rate is 5% and there is a 40% probability of significant entry into the market that would eliminate future monopoly profits. b. How would your analysis change if there were four identical Bertrand competitors rather than two? Why?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter10: Monopolistic Competition And Oligopoly

Section: Chapter Questions

Problem 3SCQ: Consider the curve in the figure below, which shows the market demand. marginal cost, and marginal...

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