Consider two firms with differentiated products, whose demand functions are given by 41 = 2 – 2pı + P2, and 42 = 2 – 2p2 + P1, where q; and p; are their quantities and prices. Their constant marginal costs are given by: c and c2. Assume that c2 = 1 is known to both firms, but c1 is known only to firm 1. Firm 2 knows that c can be either 1.2, or .8, with equal probabilities. The firms compete in prices in a simultaneous move game. (i) Find the equilibrium prices, (ii) explain what happens if private information can be revealed costlessly.

Consider two firms with differentiated products, whose demand functions are given by 41 = 2 – 2pı + P2, and 42 = 2 – 2p2 + P1, where q; and p; are their quantities and prices. Their constant marginal costs are given by: c and c2. Assume that c2 = 1 is known to both firms, but c1 is known only to firm 1. Firm 2 knows that c can be either 1.2, or .8, with equal probabilities. The firms compete in prices in a simultaneous move game. (i) Find the equilibrium prices, (ii) explain what happens if private information can be revealed costlessly.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.4P

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