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Asymmetric information problem of microeconomics Consider two firms with differentiated products, whose demand functions are given by: q1 = 2 - 2p1 + p2, and

Asymmetric information problem of microeconomics

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Consider two firms with differentiated products, whose demand functions are given by: q1 = 2 - 2p1 + p2, and q2 = 2 - 2p2 + P1, where qi and pi are their quantities and prices. Their constant marginal costs are given by: C1, C2. Assume that c2 = 1 is known to both firms, but c1 is known only to firm 1. Firm 2 knows that c1 can be either 1.2, or .8, with equal probabilities. The firms compete in prices in a simultaneous move game. (i) Find the equilibrium prices, (ii) explain what happens if private information can be revealed costlessly

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