Firm 1 and Firm2 each has a fixed cost of $20. The demand functions facing each firm is given by:

Q 1 = 12 2 P 1 + P 2

Q 2 = 12 2 P 2 + P 1

a. Find the Bertrand equilibrium.

b.Compare the Bertrand equilibrium to the collusion solution.

c. Comparing the solutions of a) and b) above, it should be clear that collusion is in the firms interest. But explicit collusion is illegal. Could implicit (tacit) collusion result in a one-shot game?

d. Suppose Firm 1 sets its price first and then Firm 2 sets its price. What price will each firm charge, how much will it sell, and what will its profit be?

e. Suppose you are one of these firms which of the following three options would you prefer? Explain why.

(i) Both firms set price at the same time (ii) You set price first (iii) Your competitor sets price first