HE401 Tutorial Exercise XI Answer

Q2. (i) Solve for the case of s price-takers and l Cournotor best-responsers. 100 sqs lql = cqs 100 sqs lql lql = cql Solution is: qs = 100 (l + c) 100c , ql = sl + 2cl + cs + c2 sl + 2cl + cs + c2

Notice that at the equilibrium, the price D equates to the marginal cost of price-taker, that is, D = cqs so that c 2 c s wc = cqs qs qs = 2 2 100 (l + c) sl + 2cl + cs + c2 =
2

c 2 1 l wc = cqs ql ql = cql qs ql 2 2

(sl + 2cl + cs + c2 ) 5000c2 (2l + c)

5000c (l + c)2
2

(sl + 2cl + cs + c2 )2

Group S

Price-taking Cournot

Group L Price-taking 5000c 5000c 2, 2 (s + l + c) (s + l + c) 2 5000c (2s + c) 5000c (s + c)2 , 2 2 (sl + 2cs + cl + c2 ) (sl + 2cs + cl + c2 )

Cournot 5000c2 (2l + c) , 2 2 (sl + 2cl + cs + c2 ) (sl + 2cl + cs + c2 ) 5000 5000 , 2s + 2l + c 2s + 2l + c 5000c (l + c)
2

Note that cc is calculated as a monopoly with s + l plants, with FOC D + (s + l) D q = C (q), where D (Q) = 1. Group L Group S Price-taking Cournot Dominant strategy: If price-taking is a dominant strategy, then we must have 5000 > 4s + c (2s + c)2 (s2 + 3cs + c2 )2 (s2 + 3cs + c2 )2 However, the second inequality can not hold true. Therefore, price-taking behavior can never be a dominant > and strategy if two groups have identical size. If Cournot is a dominant strategy, then we must have 2 5000c 5000c2 (2s + c) 5000c (s + c) 5000 < and 2 2 2 < 4s + c (2s + c) (s2 + 3cs + c2 ) (s2 + 3cs + c2 ) Or, equivalently, 2cs + c2 s2 > 0, which indicates that s can not be too large and c can not be too small. If s = 1, we need c > 2 1. (iii) For s = 1 1 5000c 5000c2 (2s + c) 5000c (s + c)
2

Price-taking 5000c 5000c 2, 2 (2s + c) (2s + c) 5000c2 (2s + c) 5000c (s + c)2 2, 2 (s2 + 3cs + c2 ) (s2 + 3cs + c2 )

Cournot 2 5000c (s + c) 5000c2 (2s + c) 2, 2 (s2 + 3cs + c2 ) (s2 + 3cs + c2 ) 5000 5000 , 4s + c 4s + c

(a) l = 2, c = 1/5 (97. 656, 97.656) (523. 72, 90. 893) (54. 553, 178. 54) (806. 45, 806. 45) No dominant strategy, NEs are (Price-taking, Price-taking) and (Cournot, Cournot) (b) l = 2, c = 4 (408. 16, 408. 16) (498. 61, 443. 21) (415. 22, 432. 53) (500.0, 500.0) Cournot is the dominant strategy for both groups, NE is (Cournot, Cournot), a unique dominant strategy equilibrium. (c) l = 3, c = 1/4 (69.204, 69.204) (570. 08, 84.331) (37.807, 105.02) (606.06, 606.06) Cournot is the dominant strategy for Large, NE is (Cournot, Cournot) (d) l = 3, c = 1 (200.0, 200.0) (661. 16, 289. 26) (185. 19, 246. 91) (555. 56, 555. 56) Price-taking is the domiant strategy for Small, Cournot is the dominant strategy for Large Unique NE: (Price-taking, Cournot) is a dominant strategy equilibrium. (e) l = 3, c = 4 (312. 5, 312. 5) (315. 58, 328. 73)

(443. 64, 362. 15) (416. 67, 416. 67)

Cournot is the dominant strategy for Large. (Price-taking, Cournot) is the unique NE.