Problem Set 5

April - 8, 11:59 pm

1 Quantity Competition
1.1 Duopoly
Consider a duopoly with the following market demand and firm cost functions

Demand : Q(p) = 360 − p

C1 (q) = 100 + 80q + q 2 C2 (q) = 150 + 120q + 0.5q 2

Firm 1 chooses the quantity to produce and then firm 2 follows. Given the quantities market determines
the price.
ˆ Question 1 Find the equilibrium price and quantity if firm 2 does not observe firm 1’s choice

ˆ Question 2 Find the equilibrium price and quantity if firm 2 observes firm 1’s choice

1.2 Triopoly
Consider an Oligopoly market with 3 firms. The market demand function and firm’s short run cost
functions are as follows
Demand : Q(p) = 150 − p
C1 (q) = 10q + q 2 C2 (q) = 15q + 0.5q 2 C3 (q) = 25q + 0.25q 2
Firms choose the quantity to produce and market determines the price. Find the Equilibrium price and
quantity if firms move simultaneously

1.3 n Firms
Assume market demand is given by P (Q) = 120 − Q and we have n firms which decide how much to
produce. The short run cost function for each firm is c(q) = 30 + 0.5q 2

ˆ Question 1: n = 2-Duopoly - find the equilibrium price, quantity (denote by qd )and firms’ profit

ˆ Question 2: Find the equilibrium price and quantity when there are n = 10 firms on the market
which still decide how much to produce according to Cournot model

ˆ Question 3: Now assume there are n = 10 price taker firms (i.e. they solve p = mc(q) to decide
how much to produce). What will be the market price and quantity demanded?

ˆ Question 4: How do answers compare in 2 and 3 and what happens when n → ∞

1.4 Stackelberg-Cournot
Consider a market with three producers. Demand is given by Q = 240 − P . Firm i’s cost function is
Ci (q) = ci q.

1.5 Fully Sequential

The first firm moves first and chooses quantity then the second firm follows and then the third firm. Find
the market price and quantity if c1 = 24, c2 = c3 = 36.

1
1.6 One Leader, Two Followers
The first firm first moves and chooses quantity then the second and third firms follow choose the quantity
simultaneously. Find the market price and quantity if c1 = 24, c2 = c3 = 36.

1.7 Two Leaders, One Follower

The first and the second firms first move simultaneously then, after choice of other firms become known
then the third firm moves. Marginal costs are the following c1 = c2 = 24, c3 = 36.

ˆ Question 1: Assume firm 1 and 2 choose quantities q1 and q2 . What will be the third firm’s choice?
express in terms of q1 and q2

ˆ Question 2: Write firm 1’s maximization problem given that firm 2 produces q2

ˆ Question 3: Find equilibrium price and quantity

2 Price as Strategic Choice Variable

2.1 Bertrand
There are two firms on the market with the cost functions C1 (q) = Cq and C2 (q) = 10 Market demand
is given by P = 60 − Q. Firms simultaneously announce the prices. Characterize equilibrium price for
different values of C ∈ [0, 60].

2.2 Dominant Price Leadership

There are two firms on the market, dominant and the follower. Market demand is given by P = 2000 − Q.
Dominant firm’s marginal cost function is M Cd (q) = 500+q and the follower’s marginal cost is M Cf (q) =
1000 + 2q. Find the price dominant firm will set and the quantities each firm will produce.