Essay
Two firms produce identical products at zero cost, and they compete by setting prices. If each firm charges a low price, then both firms earn profits of zero. If each firm charges a high price, then each firm earns profits of $30. If one firm charges a high price and the other firm charges a low price, the firm that charges the lower price earns profits of $50 and the firm charging the higher price earns profits of zero.
a. Which oligopoly model best describes this situation?
b. Write this game in normal form.
c. Suppose the game is infinitely repeated. Can the players sustain the "collusive outcome" as a Nash equilibrium if the interest rate is 50 percent? Explain.
Correct Answer:
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a. The Bertrand model (Cournot and Stack...View Answer
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