25.1 In the text, we demonstrated the equilibrium that emerges when two oligopolists compete on price when there are no fixed costs and marginal costs are constant. In this exercise, continue to assume that firms compete solely on price and can produce whatever quantity they want.

A. We now explore what happens as we change some of these assumptions. Maintain the assumptions we made in the text and change only those referred to in each part of the exercise. Assume throughout that costs are never so high that no production will take place in equilibrium, and suppose throughout that price is the strategic variable.

a. First, suppose both firms paid a fixed cost to get into the market. Does this change the prediction that firms will set p 5 MC?

b. Suppose instead that there is a recurring fixed cost FC for each firm. Consider first the sequential case where firm 1 sets its price first and then firm 2 follows (assuming that one of the options for both firms is to not produce and not pay the recurring fixed cost). What is the subgame perfect equilibrium? (If you get stuck, there is a hint in part (f).)