question archive Two firms have been competing on quantity in a duopoly for the past ten years
Two firms have been competing on quantity in a duopoly for the past ten years
Subject:EconomicsPrice: Bought3
Two firms have been competing on quantity in a duopoly for the past ten years. Entry costs are sufficiently high in the market so that there is no threat of other firms entering the market. The firms have identical costs of 2 per unit produced and face a market demand curve of P = 100 - 10(q1 + q2), where qi is firm i's quantity.
a) What is the equilibrium price, quantity and profit for each firm
After so many years of competition, the two firms are considering a merger. Leadership of the two firms believes that merging will have no implications for marginal costs.
b. What price and quantity would the merged firm set? Is it profitable for the two firms to merge
After considering the merger, the two firms agree that the DOJ would never let it move forward. As an alternative, they are now considering establishing a cartel to keep price and quantity at monopoly levels and split the resulting profits.
c) What would a grim strategy look like in this case
d) Show that the firms can sustain the monopoly price and quantity with a sufficiently high discount factor
e) List and explain two factors that could make it more difficult for the two firms to maintain the cartel in the long run
f)Now assume there is free entry in this market, and potential entrants have zero fixed cost of entry. How many firms are there in equilibrium? Should the two incumbent firms merge? Why or why not?
