Question
Consider a duopoly with firms A and B, which engage in price competition (Bertrand). Both firms offer homogenous products. Total costs are given by CA(q)
Consider a duopoly with firms A and B, which engage in price competition ("Bertrand"). Both firms offer homogenous products. Total costs are given by CA(q) = 10 q for firm A and by CB(q) = 21 q for firm B. Inverse demand is given by P(q) = 120 q. In this market, firms are only allowed to charge integer values as prices. Moreover, suppose that at a market price equal to their respective marginal cost each firm would rather be active and sell at marginal cost (yielding zero profits) than not to produce at all (also yielding zero profits). (a) Determine the equilibrium profits of the two firms. (b) Determine the maximum amount that firm A would be willing to pay firm B to exit the market. (c) Determine the minimum amount that firm B would accept to exit the market.
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