Question

Firm 1 and firm 2 are the only producers of vitamin water in the market. The market demand for vitamin water is given by P = 70 Q₁ Q₂. Firm 1 and firm 2 compete by choosing quantities Q₁ and Q₂ respectively. Each firm has a marginal cost of 10 and no fixed cost.

a)What are the reaction functions of each firm?

b)If this is a static game (both firms choose quantities simultaneously), what are the equilibrium price, quantities and profits of the two firms.

c)If firm 1 could bribe the government and get to choose its quantity first, and only after than can firm 2 decide its quantity. What would be the equilibrium quantities and profits of each of the two firms.

d)Name the type of game and specific market structure presented in part (c).

e)What is the first mover advantage? Supplement your answer using the figures found in

parts (b) and (c).