Y7

Exercise 4. Consider an infinitely repeated Bertrand game: two firms produce identical goods at constant marginal cost c, and in each period they set prices P1, P2 ER+ simultaneously. Total demand is a - bp, in which p is the lowest price-the two firms split the demand in a period if they charge the same price, and otherwise all demand goes to the lowest priced firm. Both firms discount future periods at < 1 (a) What price would a monopolist charge? (b) Construct a subgame perfect Nash equilibrium in which both firms charge exactly the monopoly price in every period. How large does 8 need to be?