Problem Set 2

1. Consider the Bertrand’s model of oligopoly setting, where n firms produce

the same item. Assume that the the cost function C(q) = cq, and the
demand function is D(p) = (α − p)+ . Prove that a price profile is an NE
iff there are at least two firms quoting pi = c, and the other firms quoting
pi ≥ c. (This question was given as an exercise in the lecture.)
2. Consider Bertrand’s model of duopoly. Let Ci (q) = ci q, with c1 < c2 .
(a) Consider the setting where the whole market is captured by firm 1
when prices are equal. Prove that the set of Nash equilibria are the
price profiles {(p1 , p2 ) ∈ [c1 , c2 ] : p1 = p2 }.
(b) Consider the setting where the market is equally split between both
the firms when prices are equal. Prove that there exist no NE.
3. Find the Nash equilibria of a 3-player Cournot’s game, where Ci (q) = ci q,
with c1 < c2 < c3 < α. Which firm produces more output in the Nash
equilibrium point?
4. Find the Nash equilibria of a 2-player Cournot’s game, where Ci (q) = q 2 .
5. A group of n firms access a natural resource to produce output. As more
of the resource is used, any given firm can produce less output. Denote
by xi the amount of the resource used by firm i. Assume that firm i’s
output is xi (1 − (x1 + · · · + xn )) if x1 + · · · + xn ≤ 1, and zero otherwise.
Each firm i chooses xi to maximize its output. Formulate this situation
as a strategic game and find its Nash equilibria. Find an action profile
(x1 , . . . , xn ) at which each firm’s output is higher than it is at the Nash
equilibrium.
6. Consider electoral competition in two districts. District 1 is worth more
electoral college votes than is district 2. The winner is the candidate who
obtains the most electoral college votes. Denote by mi the median favorite
position among the citizens of district i, for i = 1, 2; assume that m2 < m1 .
Each of two candidates chooses a single position. Each citizen votes for
the candidate whose position is the closest to his favorite position. The
candidate who wins a majority of the votes in a district obtains all the
electoral college votes of that district; if the candidates obtain the same
number of votes in a district, they each obtain half of the electoral college
votes of that district. Find the Nash equilibria of the strategic game that
models this situation.

1
 7. Consider a game in which the players are the citizens. Any citizen may,
at some cost c > 0, become a candidate. Assume that the only position a
citizen can contest is his favorite position. After all citizens have (simulta-
neously) decided whether to become candidates, each citizen votes for his
favorite candidate, as in the electoral competition game. Winning confers
the benefit b. Assume b > c. Thus a citizen who becomes a candidate
and ties with (k − 1) other candidates for first place obtains the utility
b/k − c; a citizen who is not one of the candidates tied for first place
obtains the utility −c; and a citizen who does not become a candidate
obtains the utility 0. Assume that for every position x there is a citizen
for whom x is the favorite position. Show that if b ≤ 2c, then the game
has a Nash equilibrium in which one citizen becomes a candidate. Is there
an equilibrium (for any values of b and c) in which two citizens, each with
favorite position m, become candidates? Is there an equilibrium in which
two citizens with favorite positions different from m become candidates?
8. Two people submit sealed bids for an object worth $K to each of them.
The winner is the person whose bid is higher; in the event of a tie each
person receives half of the object, which he values at $K/2. Each person
pays his bid, whether or not he wins. Prove that the game has no Nash
equilibrium.
9. Consider the third price auction setting with n buyers. Let v1 > v2 >
· · · > vn . Prove that there is no Nash equilibrium where player n wins.

Answers
3. A unique Nash equilibrium.

α+c2 +c3 −3c1 α+c1 +c3 −3c2 α+c1 +c2 −3c3



 4 , 4
, 4 if α ≥ 3c3 − c1 − c2
α+c2 −2c1 α+c1 −2c2
(q1 , q2 , q3 ) = 3 , 3 ,0 if α ∈ [2c2 − c1 , 3c3 − c1 − c2 ]
 α−c1


2 , 0, 0 otherwise.

Firm 1 produces more output at the equilibrium.

4. A unique Nash equilibrium (q1 , q2 ) = α5 , α5 .

 
1 1 1 1


5. A unique Nash equilibrium n+1 , . . . , n+1 . At the profile 2n , . . . , 2n ,
each firm produces a higher output at Nash equilibrium.
6. A unique Nash equilibrium (m1 , m1 ).
7. No equilibrium exists with two citizens, each with favorite position m. An
equilibrium point exists with {(s1 , s2 ) : m = s1 +s
2 }, when (i) b ≥ 2c, and
2

(ii) s1 and s2 are sufficiently close to m such that a candidate at m cannot

enter and win the game.