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IV. (Symmetry with an Arbitrary Degree of Substitution/Complements) Consider two firms, 1 and 2, producing differentiated products. The demands for the two products are symmetric
IV. (Symmetry with an Arbitrary Degree of Substitution/Complements) Consider two firms, 1 and 2, producing differentiated products. The demands for the two products are symmetric and given by qi = 10 - 2pi + YP;, (4) for j # i, i = 1, 2, y is a demand parameter measuring diversion ratio and the degree of product differentiation, and y E [-2, 2). The marginal costs of production for both firms are $1. Answer the following three questions for each of the following values of y = 0, 1, -1, and -2, respectively. 1. Suppose that the two firms compete by simultaneously choosing their prices. Determine the Bertrand-Nash equilibrium prices, and firm profits. 2. Suppose that the two firms choose their prices to maximize their joint profits (through price-fixing collusive agreements or through a merger). Determine the optimal prices, and firm profits. 3. Compare the outcomes from the above two settings and discuss the implications
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