Question
Let's formulate a model for an infinite-period duopoly game involving two identical firms. The degree of substitution or complementarity between their products is denoted as
Let's formulate a model for an infinite-period duopoly game involving two identical firms. The degree of substitution or complementarity between their products is denoted as "B." We will assume that both the demand function and cost function are linear. Additionally, we will consider that "r" represents the risk-free rate of interest, and all agents involved (managers, shareholders, and consumers) are risk neutral. a. Calculate the value function for each firm. b. Explore the implications if each firm acquires a 10% ownership stake in the other firm. c. Investigate the consequences if each firm is permitted to engage in short selling of the shares of the other firm. Feel free to introduce any necessary assumptions, and I will ensure clarity regarding the assumptions made in the model.
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