Assume there are two firms that operate in a regulated industry, such as cable tv. In October , the firms must submit proposals to deregulate the industry to the town's board of selection. Initially assume that deregulation passes if and only if both firm support deregulation. In the second stage, the firms will compete based on price. If the industry is deregulated, the firm will choose their prices simultaneously. Otherwise, if only one firm or none support deregulation, the industry will continue to be regulated and the firms will use the price set by regulation.

Demand for each firm is given by the following demand functions:

Q1= 12000 +25p2 - 60p1 Q2= 8000 + 30p1 - 40 p2

When deregulated each firm has the following per unit costs:

C1= 15$ C2= 12$

When regulated, the additional costs of mandated reporting and taxation raises per unit costs of 30$ for both firms ( C1=C2=30$ in the regulated industry). Also, when regulated, the price is set to 165$ for both firms ( P1=P2=165$)

-Round all dollar values tot the nearest cent (2 decimal places) and round all quantities down to the nearest whole unit.

2- a/ If the two firms were to compete on prices in a deregulated market what would be the equilibrium prices and quantities be ? what would be the resulting profits be?( to save time, the best response for firm 2 is p2 = 106+ (3/8)P1

2-b/ Sketch a combination game table and or game tree that models this game. Assume the first round is simultaneous where each firm has to propose either regulation or deregulation. The second round is the firms set their prices simultaneously ( if regulated , they do not get to choose their own pricing model but must set their prices according to regulation).

2-c/ find the Nash equilibria and explain what market outcome you expect. Include whether each firm proposes to continue regulation or deregulation and what prices, quantities and profits will prevail. Explain why you think this will be the outcome in the market.

2-b/ Now assume that the proposal to deregulate would require a media campaign to convince a majority of voters to support deregulation. If the estimated cost is 50,000$ er company what would expect to happen? Why?

2-e/ How do your answers to part c and d relate to industry advocacy group ( when a group of firms in one industry pool advertising and lobbying money?)