Consider the following version or the linear Cournot duopoly model. The market price, P is determined by (inverse) market demand: P =1- Q if Q<1, P = 0 otherwise Each firm decides on the quantity to sell (market share): q1 and q2. Q = q1 + q2 total market demand. Both firms seek to maximize profits. There are no fixed costs. The marginal cost of producing each unit of the good: c1 and c2. c1 is common knowledge and equal to , however c2 is known only by firm 2. Firm 1 believes that c2 is 'high" c = } with probability and 'low' c = 0 with probability . Firm l’s belief about firm 2's cost is common knowledge Find the pure strategy Bayes Nash Equilibrium and compare it to the situation in which the cost of firm 2 is common knowledge. Does firm 2 have an incentive to reveal her cost when it is low? When it is high? What do you conclude?
Consider the following version or the linear Cournot duopoly model. The market price, P is determined by (inverse) market demand: P =1- Q if Q<1, P = 0 otherwise Each firm decides on the quantity to sell (market share): q1 and q2. Q = q1 + q2 total market demand. Both firms seek to maximize profits. There are no fixed costs. The marginal cost of producing each unit of the good: c1 and c2. c1 is common knowledge and equal to , however c2 is known only by firm 2. Firm 1 believes that c2 is 'high" c = } with probability and 'low' c = 0 with probability . Firm l’s belief about firm 2's cost is common knowledge Find the pure strategy Bayes Nash Equilibrium and compare it to the situation in which the cost of firm 2 is common knowledge. Does firm 2 have an incentive to reveal her cost when it is low? When it is high? What do you conclude?
Chapter26: Monopolistic Competition And Oligopoly
Section: Chapter Questions
Problem 13E
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