1) The two firms in an industry, A and B, use a constant returns to scale technology, so face marginal cost c. Market demand conditions are described by the relationship p+ p₁x po = 0, where po and p₁ are (constant) parameters, x is the industry output, and p is the market price. Write a report in which you a) Set out the assumptions which underlie the Cournot, and Bertrand, models of competition. b) Demonstrate that in Cournot competition, firms produce less than in Bertrand competition, so that the market price is higher in Cournot competition, and firms make greater profits. c) Explain how we can adapt the Cournot model of competition to set up the Stackelberg model (you should assume that firm A acts as the quantity leader). Define the concept of subgame perfection, and apply that to derive the subgame perfect equilibrium in the Stackelberg model, demonstrating how firm A benefits from being the quantity leader.

1) The two firms in an industry, A and B, use a constant returns to scale technology, so face marginal cost c. Market demand conditions are described by the relationship p+ p₁x po = 0, where po and p₁ are (constant) parameters, x is the industry output, and p is the market price. Write a report in which you a) Set out the assumptions which underlie the Cournot, and Bertrand, models of competition. b) Demonstrate that in Cournot competition, firms produce less than in Bertrand competition, so that the market price is higher in Cournot competition, and firms make greater profits. c) Explain how we can adapt the Cournot model of competition to set up the Stackelberg model (you should assume that firm A acts as the quantity leader). Define the concept of subgame perfection, and apply that to derive the subgame perfect equilibrium in the Stackelberg model, demonstrating how firm A benefits from being the quantity leader.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.3P

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