5. Firms 1 and 2 compete on quantity with some product differentiation. They each have zero cost of production (zero marginal cost, zero fixed cost), but firm 1 may advertise and incur related costs. Demand for firm 1 is P1 = 10 – 91 - 92 + A, where q, and q, are quantities for firms 1 and 2, and A is firm l's level of advertising. The cost of advertising is A?. Firm 2 does not advertise. Demand for firm 2 is P2 = 10 – 41 - 92- First we consider the static game where all actions are simultaneous; thus, player l's strategy is s, = {41,A}, and player 2's strategy is s, = 42. a. Find firm 2's best response to some belief in s,. %3D b. Find the Nash Equilil ium quantities {a. a and advertising level A in the static
5. Firms 1 and 2 compete on quantity with some product differentiation. They each have zero cost of production (zero marginal cost, zero fixed cost), but firm 1 may advertise and incur related costs. Demand for firm 1 is P1 = 10 – 91 - 92 + A, where q, and q, are quantities for firms 1 and 2, and A is firm l's level of advertising. The cost of advertising is A?. Firm 2 does not advertise. Demand for firm 2 is P2 = 10 – 41 - 92- First we consider the static game where all actions are simultaneous; thus, player l's strategy is s, = {41,A}, and player 2's strategy is s, = 42. a. Find firm 2's best response to some belief in s,. %3D b. Find the Nash Equilil ium quantities {a. a and advertising level A in the static
Chapter10: Monopolistic Competition And Oligopoly
Section: Chapter Questions
Problem 1.1P
Related questions
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![Additional Applications
5. Firms 1 and 2 compete on quantity with some product differentiation. They each have
zero cost of production (zero marginal cost, zero fixed cost), but firm 1 may advertise and
incur related costs. Demand for firm 1 is
P1 = 10 – 41 - 42 + A,
where q, and q, are quantities for firms 1 and 2, and A is firm l's level of advertising.
The cost of advertising is A?. Firm 2 does not advertise. Demand for firm 2 is
P2 = 10 – 41 - 92-
First we consider the static game where all actions are simultaneous; thus, player l's
strategy is s, = {41, A}, and player 2's strategy is s, = 42.
a. Find firm 2's best response to some belief in s1.
b. Find the Nash Equilibrium quantities {q1,42} and advertising level A in the static
game.
Now suppose the game is dynamic. Firm 1 sets advertising A1, both firms observe A,, and
then both firms simultaneously set quantities.
c. Find the Nash Equilibrium in the quantity-setting subgame, after A, has been
chosen.
d. Given your previous answer, find the optimal A and the resulting quantities.
e. Discuss why A is bigger or smaller in part (d) compared to part (b).](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe24b267d-8d25-43cf-9da5-beb0d51b95de%2F0fbaa5a0-7f4b-4594-a08e-716b5337f6a6%2Fpdbvj3h_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Additional Applications
5. Firms 1 and 2 compete on quantity with some product differentiation. They each have
zero cost of production (zero marginal cost, zero fixed cost), but firm 1 may advertise and
incur related costs. Demand for firm 1 is
P1 = 10 – 41 - 42 + A,
where q, and q, are quantities for firms 1 and 2, and A is firm l's level of advertising.
The cost of advertising is A?. Firm 2 does not advertise. Demand for firm 2 is
P2 = 10 – 41 - 92-
First we consider the static game where all actions are simultaneous; thus, player l's
strategy is s, = {41, A}, and player 2's strategy is s, = 42.
a. Find firm 2's best response to some belief in s1.
b. Find the Nash Equilibrium quantities {q1,42} and advertising level A in the static
game.
Now suppose the game is dynamic. Firm 1 sets advertising A1, both firms observe A,, and
then both firms simultaneously set quantities.
c. Find the Nash Equilibrium in the quantity-setting subgame, after A, has been
chosen.
d. Given your previous answer, find the optimal A and the resulting quantities.
e. Discuss why A is bigger or smaller in part (d) compared to part (b).
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