(Bertrand Stage game).Suppose two firms compete in micro-chip industry. The

market demand curve ofQ= 51P. Each period firm 1 charges pricep1chips and firm 210

charges pricep2chips. Both firms have a constant marginal cost of $20 per chip. Suppose the same industry exists for an infinite number of periods, the discount factor for profits is

=.8.

1. What are the static Nash equilibrium strategies for this market? That is, what is the
2. NE if the game is played once? What are profits for a single period in this case?
3. Suppose the two firms agree to maximize joint profits rather than individual profits and share the proceeds equally(collusion). What price does each firm agree to charge? What are firms profits for a single period?
4. Suppose the firms have agreed to maximize joint profits, but while firm 2 charges the price according to the agreement, firm 1 decides to cheat and maximize individual profits instead. What price firm 1 should charge? What are profits for each firm?
5. Write down the grim trigger strategy.
6. If both firms follow the grim trigger strategy, what is the present discounted value of firm1's profits?
7. If firm 2 follows the grim trigger strategy, but firm 1 deviates from it, what is the highest present discount value that firm 1 can obtain.
8. Is the grim trigger strategy an equilibrium? Why or why not?