consider a market for two differentiated products. demand for good 1 is d1 = 1-p1 + 1/4p2 and demand for second is d2 = 1-p2 + 1/4p1 where p1 and p2 are prices of the goods. Suppose firm 1 produces good 1 and firm 2 produces good 2. All production costs are sunk, that is, firms supply at zero production cost. Assume that firms compete in prices. (a) Calculate the diversion ratio. b) Derive the reaction function of each firm and calculate the Nash equilibrium in prices.

consider a market for two differentiated products. demand for good 1 is d1 = 1-p1 + 1/4p2 and demand for second is d2 = 1-p2 + 1/4p1 where p1 and p2 are prices of the goods. Suppose firm 1 produces good 1 and firm 2 produces good 2. All production costs are sunk, that is, firms supply at zero production cost. Assume that firms compete in prices. (a) Calculate the diversion ratio. b) Derive the reaction function of each firm and calculate the Nash equilibrium in prices.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.7P

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