ECON 2310 Chapter Notes - Chapter 19: Bertrand Competition

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azurecrow744

17 Dec 2011

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Because each firm is concerned with only its own profit and not it"s rivals, it may be tempted to lower price to expand sales. If both firms do this, the resulting competition lowers sales. Game theory looks for price & quantities choices at which each firm is doing as well as it can given the prices charged or quantities produced by rivals. In nash equilibrium, each firm is choosing a best response to the actions of its rivals. 19. 2 the bertrand model: price competition with homogeneous products. Bertrand model of oligopoly: if both firms charge the same price, each firm will sell to half of the market at that price. In bertrand model, temptation to undercut is so tempting that prices are driven all the way down to mc. In many settings, a firm can only sell a limited quantity at any point in time. May have limited inventory or face constraints.

Related Questions

There are two firms in the industry. Let q1 and q2 be the two firms in an industry and Q= q1 + q2 be the total output. The inverse demand in the industry if P (Q)= 45 - Q. The cost function for each firm is C(qi) = 9qi.

Assume oligopolistic competition between the two firms is Bertrand. Which of the following options are true?

A. Each firm tries to maximize its profit while choosing its output while taking its rival's output choice as given.

B. Both of the above are true.

C. Each firm tries to maximize its profit while choosing its price while taking its rival's price to be given.

D. None of the above is true.

The equilibrium prices and output of Firm 1 and Firm 2, assuming that the consumers will split evenly between the two firms if the firms offer the same price, are :

A. 6,18

B. 9, 15

C. 9, 18

D. 4,5

Each firm's profit level is:

A. 9

B. 5

C. 0

D. 36

The consumer surplus is given by:

A. 0

B. 856

C. 36

D. 648

The market outcome under Bertrand competition is:

A. Perfectly identical to the competitive market outcome.

B. The equilibrium price is more but the equilibrium quantity is less than the competitive market.

C. The equilibrium price is less but the equilibrium quantity is more than the competitive market.

D. The equilibrium price and quantity are less than the competitive market equilibrium price and quantity.

Please Explain Answers

beigekoala601

Consider a Bertrand model with two firms facing the market demand Q(p)= 100 - p. Both firms have a constant marginal cost of 20. The firms compete over prices, but each firm has a production capacity of 25 units.

a) If Firm 1 believes that Firm 2 will use up all of its capacity, what price does it charge? In a diagram, show Firm 1 residual demand and the profit-maximizing price.

b) What do you expect the Nash equilibrium to be for this capacity constraint Bertrand competition? Explain your answer.

pucemarten302

16 points) Consider a homogenous good market with the following market demand curve: Q=100-p

Two firms produce output at a constant marginal cost = 10. Derive the Nash equilibrium outcome in terms of prices, outputs, and the profits of the two firms under the following alternative situations in a)-d)

a) (3 points) Firms engage in Bertrand price competition with no capacity constraints.

b) (3 points) Firms engage in Bertrand price competition and each firm has a maximum production capacity = 15.

c) (2 points) How would your answer in part (b) change if the capacity of each firm is 90?

d) (5 points) Firms engage in Cournot quantity competition (i.e., determine their capacity assuming that the price is such that market demand equals industry capacity).

e) (3 points) Compare the industry output in cases (a) and (d) to the socially optimal and the monopoly output levels.

ultramarinewoodchuck453

ECON 2310 Chapter Notes - Chapter 19: Bertrand Competition

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