A market has a total demand for 100 units of the product produced. Firms L and F operate in the market and compete in prices. Consumers buy from the cheapest firm and split equally between the firms if the firms’ prices are the same. The firms have the same marginal cost c. Firm L sets its price first and firm F sets its price only after that. Suppose that the smallest amount by which prices can be changed is ε. (a) Suppose that firm L sets the monopoly price pL = pM. What price does firm F set in response and what profits do the two firms earn? Comment on the outcome of this sequential price competition game as compared to the sequential quantity competition game in the slides. (b) Suppose instead that Firm L sets the price pL = c. What price does firm F set in equilibrium and what profits do the two firms earn?

A market has a total demand for 100 units of the product produced. Firms L and F operate in the market and compete in prices. Consumers buy from the cheapest firm and split equally between the firms if the firms’ prices are the same. The firms have the same marginal cost c. Firm L sets its price first and firm F sets its price only after that. Suppose that the smallest amount by which prices can be changed is ε. (a) Suppose that firm L sets the monopoly price pL = pM. What price does firm F set in response and what profits do the two firms earn? Comment on the outcome of this sequential price competition game as compared to the sequential quantity competition game in the slides. (b) Suppose instead that Firm L sets the price pL = c. What price does firm F set in equilibrium and what profits do the two firms earn?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter13: best-practice Tactics: Game Theory

Section: Chapter Questions

Problem 1E

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