Question
Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price
Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price equal to the marginal cost (MC). But what happens if the two firms have unequal marginal costs? Suppose that Dogwood has MC = $40 and Rose Petal has MC = $25. Assume firms can set prices such as $29.99. a. Explain why it is not a Nash equilibrium for both firms to set a high price such as $60. b. Explain why it is not a Nash equilibrium for both firms to set a price equal to the lower marginal cost of $25. c. Explain why it is not a Nash equilibrium for each firm to set a price equal to their respective marginal costs.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started