The city of Pittsburgh wants to have Scoot-Away Inc. (SA) and ElectricSlide Co. (ES) operate scooters in their town. The period demand for scooters in Pittsburgh is P = 156 Q Yet, the Pittsburgh department of transportation decides run their contracting as follows: (1) firms submit proposals (how many scooters to operate) simultaneously, (2) firms retain the right to change their quantities in future periods, and (3) the contracts do not expire. The marginal cost of operating a scooter is also zero in Pittsburgh.

1. If both firms decide to operate (e.g. F sufficiently small), what are the (monthly) Cournot-Nash equilibrium quantity (QNE) and price (P NE) in the market? 2. How does the level of the fixed cost F affect (QNE) and price (P NE)? 3. Now, and for the remainder of the problem, assume F = 0. Under this new contracting scheme, ES and SA can adjust their quantities monthly. Does there exist an SPNE in which qSA = qES = 45? Explain why or why not? 4. Does there exist an SPNE in which qSA = qES = 55? Explain why or why not? 5. Describe one SPNE in which P > P NE. Under what conditions does such an equilibrium exist? 6. A year after scooters arrive in Pittsburgh, the city experiences a sudden rise in scooter rental prices. Officials suspect SA and ES are colluding, and decides to set up a task force to determine if this is so. They must decide how much to invest in their detection capability (probability of detection) q. There is no mechanism to fine SA and ES, so authorities must rely on their detection capabilities. If collusion is detected, SA and ES must set (Cournot) oligopoly prices forever. Moreover, the city believes that SA and ES discount future profits at = 0.75, and they are playing a Grim-Trigger equilibrium. What is the minimum level of q that will thwart this form of collusive behavior? 7. If the cost of detection capability is C(q) = 1500 + 500 q, Econ 444: Problem Set #4 5 would Pittsburgh residents, who only care about consumers' surplus, be willing to vote for establishing such a task force? Explain why or why not. Be specific.