Question

There are 3 firms in a market with differentiated products. The marginal cost of production for...

There are 3 firms in a market with differentiated products. The marginal cost of production for each firm is c=20. There are no fixed costs. The system of inverse demands in this market is given by:

P1=120-q1-0.5(q2+q3)

P2=120-q2-0.5(q1+q3)

P3=120-q3-0.5(q1+q2)

And the corresponding demand system is

q1=60-1.5P1+0.5(P2+P3)

q2=60-1.5P2+0.5(P1+P3)

q3=60-1.5P3+0.5(P1+P2)

a. Suppose the 3 firms operate independently, and choose prices simultaneously. Find the best response function of each firm to the prices of its two rivals.

b. Find the equilibrium prices, and the profit each firm makes.

c. Suppose firms 1 and 2 merge. Each firm still sells the same differentiated product, hence the demand system remains the same after merger, but the merged firm can choose prices p1 and p2 together to maximize the join profit of the merged firm. Write the profit maximization problem of the merged firm (i.e., maximize sum of profits over a choice of the two prices). Write the 2 first order conditions (one with respect to each price).

d. Solve for the equilibrium market prices after merger (the system you need to solve had the two first order conditions from part c and the best response of firm 3 which is unchanged). How to after merger prices compare to pre-merger prices?

e. Find the profit of the merged firm. Compare it to the total profit of these two firms before merger. Was merger profitable?

f. Was merger profitable for the non-merging firm? Intuitively explain.

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider two firms are performing Cournot price competition in two differentiated goods markets. Firm 1 produces...
Consider two firms are performing Cournot price competition in two differentiated goods markets. Firm 1 produces goods 1, and firm 2 produces goods 2, and two market demand functions are given by q1(p1,p2) = 12 - 2p1 +p2 and q2(p1,p2) = 15q22 + 45Q . Furthermore, assume that the two firms have the same cost function such that fixed cost is $20 and variable cost is zero. (10pts) Calculate the equilibrium prices, quantities and profits for both firms. (10pts) Assume...
11. Suppose two firms (1 and 2) sell differentiated products and compete by setting prices. The...
11. Suppose two firms (1 and 2) sell differentiated products and compete by setting prices. The demand functions are q1 = 7 − P1 + (P2/2) and q2 = 7 − P2 + (P1/2). Firms have a zero cost of production. (a) Find the Nash equilibrium in the simultaneous-move game. Also find the quantities sold by each firm. [5 marks] (b) Find the subgame-perfect equilibrium if 1 moves before 2. Also find the quantities sold by each firm. [5 marks]...
Two Cournot firms produce slightly different products. Product prices depend on both firms' outputs and are...
Two Cournot firms produce slightly different products. Product prices depend on both firms' outputs and are determined by the following equations P1 = 70 - 2Q1 - Q2, P2 = 100 - Q1- 2Q2. Both Firm 1 and Firm 2 have constant marginal cost of $10 and zero fixed cost. Firm 1 chooses Q1 and Firm 2 chooses Q2. (3pts) Find Firm 1's best response as a function of Firm 2's output Q2.   (3pts) Find Firm 2's best response as...
Two firms compete by choosing price. Their demand functions are Q1 = 20 - P1 +...
Two firms compete by choosing price. Their demand functions are Q1 = 20 - P1 + P2 and Q2 = 20 +P1 -P2 where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands. Note that the demand for each good depends only on the difference in prices; if the two firms colluded and set the same price, they could make that price as high as they wanted, and earn infinite...
3. (i) A monopolist faces the following demand and total cost functions: Q1 = 65 -1/2P,...
3. (i) A monopolist faces the following demand and total cost functions: Q1 = 65 -1/2P, TC = Q2 + 10Q + 50 (a) Calculate the profit maximizing output and price of the monopolist. Calculate the resulting profit. (12 points) (b) Suppose the government imposes an excise tax of $30 on the production and sale of the product. Calculate the resulting optimal profit maximizing output and price for the monopolist. Also determine the level of profit. (12 points) (c) If...
A monopolist produces a product in one central production facility using the cost structure: TC =...
A monopolist produces a product in one central production facility using the cost structure: TC = (1/2) Q2 +300 and sells it in two different markets with the following demand functions: Market 1: P1 = 60 – (1/4)Q1 Market 2: P2 = 80 – (1/2)Q2 where Q =Q1 + Q2 Calculate the amounts of outputs, Q1 and Q2 that the monopolist should produce and the prices that it should charge if it wants to maximize total profit. Calculate the amount...
Two firms exist in a market. Demand for firm 1’s product is Q1 = 100 –...
Two firms exist in a market. Demand for firm 1’s product is Q1 = 100 – p1 + ½ p2 Demand for firm 2’s product is Q2 = 100 – p2 + ½ p1 What tells an economist that these two products are substitutes for each other? What tells an economist that these two products are not perfect substitutes? What model would you recommend using to solve for p1 and p2?
1. Two firms currently produce the goods q1 and q2 separately. Their cost functions are C(q1)...
1. Two firms currently produce the goods q1 and q2 separately. Their cost functions are C(q1) = 25 + q1, and C(q2) = 45 + 2q2. If the two firms merge, it is estimated that the merged firm can produce the two goods jointly with costs described by the function C(q1, q2) = 45 + 2q1 + q2. Are there scope economies in this case that would justify the merger?
Two firms currently produce the goods q1 and q2 separately. Their cost functions are C(q1) =...
Two firms currently produce the goods q1 and q2 separately. Their cost functions are C(q1) = 25 + q1, and C(q2) = 45 + 2q2. If the two firms merge, it is estimated that the merged firm can produce the two goods jointly with costs described by the function C(q1, q2) = 45 + 2q1 + q2. Are there scope economies in this case that would justify the merger? [5 pts.]
There is a monoplolistic firm which knows that the market demand function is p = 1-q....
There is a monoplolistic firm which knows that the market demand function is p = 1-q. If the firm can set two prices p1, and p2 Find the p1, p2 the firms will set and also find the q1,q2 according to the prices. and Tell which price discrimination method that this pricing is the closest to.