4. a)

In the Bertrand model with product differentiation, suppose that the two Bertrand firms face the following symmetric demand curves:

q1 =12? p1 + p2 q2 =12?p2 +p1

where q1 , q2 ? 0 and p1 , p2 ? 12. Also assume that MC1 =AC1 =MC2 =AC2 =0

i) Draw the price reaction functions and find the Bertrand equilibrium. (1+1+2=4 points)

ii) How does product differentiation affect the "Bertrand paradox"?

(2 points)

4. a) In the Bertrand model with product differentiation, suppose that the two Bertrand firms face the following symmetric demand curves: 91 = 12- P1 + P2 92 = 12- P2 + PI where q1, 92 20 and P1, P2