An incumbent firm, Firm 1, faces a potential entrant, Firm 2 that has a lower marginal cost. The market demand curve is p = 120 – q1 – q2. Firm 1 has a constant marginal cost of $20, where Firm 2’s is $10, and they have no fixed costs.
a. What are the Nash-Coumot equilibrium price, quantities, and profits without government intervention?
b. To block entry, the incumbent appeals to the government to require that the entrant incur extra costs. What happens to the Nash-Cournot equilibrium if the legal requirement causes the marginal costs of the second firm to rise to that of the first firm, $20?