Technology and Innovation.

Two firms produce classroom video projectors. Demand for these projectors is given by P = 200 Q. Firm 1 has developed a proprietary technology that enables it to produce projectors at a constant marginal and average cost of $10 each. Firm 2 has an older technology that enables it to produce projectors at a constant marginal and average cost of $15 each.

Assume the two firms compete in prices (undifferentiated Bertrand).

(i) Find the trembling hand perfect equilibrium (- see lecture on Static Oligopoly). What are the equilibrium price, quantities, and firm profits if firm 1 uses its proprietary technology and firm 2 uses its old technology?

(ii) Suppose firm 2 could develop a 'copycat' technology with identical costs to firm 1 (MC = AC = 10). How much, if anything, should it be willing to spend to develop that technology?

(iii) What is the social value of developing this 'copycat' technology given Bertrand competition? (Value = + CS)