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# 5. [30 MARKS] Two profit-maximising firms produce differentiated products at no cost and compete

Question: 5. [30 MARKS] Two profit-maximising firms produce differentiated products at no cost and compete in prices. Letting i, j = 1,2 with ij, the inverse demand function and the corresponding demand function faced by each firm i are 2 3 Pi = 1200-qizl and qi = (12 (12003pi 2pj) (a) [5 MARKS] Find the equilibrium prices and quantities. (b) [5 MARKS] In a graph,
Show transcribed image textAnswer : EQUILIBRIUM PRICE : The equilibrium price is wher…View the full answerTranscribed image text: 5. [30 MARKS] Two profit-maximising firms produce differentiated products at no cost and compete in prices. Letting i, j = 1,2 with ij, the inverse demand function and the corresponding demand function faced by each firm i are 2 3 Pi = 1200-qizl and qi = (12 (12003pi 2pj) (a) [5 MARKS] Find the equilibrium prices and quantities. (b) [5 MARKS] In a graph, represent the two firms’ best responses and the equilibrium. (c) [5 MARKS] Suppose that the two firms merge to create a monopoly. What are the equilibrium prices and quantities? (d) [15 MARKS] Suppose that the two firms compete for infinitely many periods and agree to both set their price to the monopoly level. Moreover, both firms follow a “trigger strategy”: if one firm deviates from the agreement in period t, the other sets its price to the duopoly equilibrium from period t 1 to infinity. Let 8₁ and 82 (with 8₁,82 € [0, 1]) be the discount rates of firms 1 and 2, respectively. For what values of 8₁ and 2 is the collusive agreement sustainable? error: Content is protected !!