Exercise 6.5 Suppose there are only two companies (1 and 2) that fix flat tyres in the local market and compete in a duopoly of Cournot. The two companies repair punctures identically, so consumers will not care about repairing the puncture in company 1 or 2. The inverse demand curve for this market is: P=100-2Q, where Q is the total number of punctures repaired per day by the two companies, that is: Q=q1+q2. The marginal cost of repairing a flat tyre for company 1 is 12 euros, while for company 2 it is 20 euros. We will assume that neither company has fixed costs. a) Suppose that this market is a Stackelberg oligopoly and that company 1 is the first to decide how many punctures to repair each day. How many punctures a day will each company repair? What will be the market price of repairing a puncture? How much profit will each company make per day? b) Suppose now that the two firms, instead of competing in quantities, compete on prices according to Bertrand's model. Determine what the price, equilibrium amount, and profits will be if: The marginal cost of repairing a puncture is equal to 12 euros in the two companies. The marginal cost of company 1 is €12, while the marginal cost of firm 2 is €20. Represent graphically.
Exercise 6.5
Suppose there are only two companies (1 and 2) that fix flat tyres in the local market and compete in a duopoly of Cournot. The two companies repair punctures identically, so consumers will not care about repairing the puncture in company 1 or 2. The inverse demand curve for this market is: P=100-2Q, where Q is the total number of punctures repaired per day by the two companies, that is: Q=q1+q2. The marginal cost of repairing a flat tyre for company 1 is 12 euros, while for company 2 it is 20 euros. We will assume that neither company has fixed costs.
a) Suppose that this market is a Stackelberg oligopoly and that company 1 is the first to decide how many punctures to repair each day. How many punctures a day will each company repair? What will be the market
b) Suppose now that the two firms, instead of competing in quantities, compete on prices according to Bertrand's model. Determine what the price, equilibrium amount, and profits will be if:
- The marginal cost of repairing a puncture is equal to 12 euros in the two companies.
- The marginal cost of company 1 is €12, while the marginal cost of firm 2 is €20.
- Represent graphically.
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