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Q5 Discrete Bertrand Duopoly Consider the following variation of the Bertrand competition model (e.g., price competition) discussed in class. Two firms, 1 and 2, are
Q5 Discrete Bertrand Duopoly Consider the following variation of the Bertrand competition model (e.g., price competition) discussed in class. Two firms, 1 and 2, are producing the same identical product. Firms compete in prices: Firm 1 chooses p1, and Firm 2 chooses p2. Given p, and p2, the individual demands of firms are: 10 - PI PI P2 92 (P1, P2) = 10 - p2 P1 > P2 10-P1 2 P1 = P2 10-P2 2 P1 = P2 Both firms have constant marginal costs of c. To sum up, the payoffs are as follows: mi(PI, P2) = [PI - cq(P1, P2) 72(P1, P2) = [p2 - c] q2(P1, P2) Unlike the standard Bertrand model, both firms are only allowed to charge the whole dollar prices ( both p, and p2 have to be integers). (a) Find all Nash equilibria (if any) when c = 2. (b) Find all Nash equilibria (if any) when c = 2.5
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