question archive Two firms are engaged in Bertrand competition
Two firms are engaged in Bertrand competition
Subject:EconomicsPrice: Bought3
Two firms are engaged in Bertrand competition. There are 10,000 people in the population, each of whom is willing to pay at most 10 for at most one unit of the good. Both firms have a constant marginal cost of 5. Each firm is allocated half the market. It costs a customer s to switch from one firm to the other. Customers know what prices are being charged. Law or custom restricts the firms to charging whole-dollar amounts (e.g., they can charge 6, but not 6.50).
a. Suppose that s = 0. What are the Nash equilibria of this model? Why does discrete (whole-dollar) pricing result in more equilibria than continuous pricing?
b. Suppose that s = 2. What is (are) the Nash equilibrium (equilibria) of this model?
c. Suppose that s = 4. What is (are) the Nash equilibrium (equilibria) of this model?
d. Comparing the expected profits in (b) to those in (c), what is the value of raising customers’ switching costs from 2 to 4?
