Question 1:

Suppose firm 1 and firm 2 each produce the same product and face a market demand curve described by Q = 5,000 - 200P. MC1 = $6, and MC2 = $10. Assume that firms can choose their prices in increments of $1.00 only.

a.What is the Bertrand Nash Equilibrium for this market? Justify your answer and show no firm has any incentive to change its behavior.

b.What are the profits for each firm?

c.Is this market outcome efficient? Justify your answer.

Question 2:

Suppose you observe the same market from Question 1, however, not each firm has a capacity constraint. Firm 1 can only produce up to 1,500 units and firm 2 can only produce up to 1,000 units.

a.What is the Bertrand Nash Equilibrium for this market? Justify your answer and show no firm has any incentive to change its behavior.

b.What are the profits for each firm?

c.Is this market outcome efficient? Justify your answer.

Question 3:

Coca-Cola and Pepsi are the dominant firms in the soda market. Each firm has developed a wide range of products to suit the tastes and preferences of consumers. Discuss the competition between Coke and Pepsi in terms of the parameters of the Bertrand Spatial Differentiation model.

For the firm, the relevant parameters are:

Price, Cost (assume that ATC = MC)

For the consumer (consider separate segments here), the parameters are:

Value, travel cost, distance between products, distance from either Coke or Pepsi

How do we practically observe this type of competition here? How would brand loyalty be observed here? Consider surplus from each firm in your discussion. (Hint: Where do each of these parameters come from and what practical significance do they have here?)