Question

QUESTION 16

Bertrand’s price competition (implicitly or explicitly) assumes that:

    a. Firms have some degree of market power and are not “small”.

    b.   There is intense price competition, in the sense that consumers can switch from one supplier to another at no, or a very low, switching cost.

    c.   Collusion is not possible.

    d.   All of the above.

QUESTION 17

In Stackelberg’s model:

    a. “The follower” could be interpreted as a group of followers, each of which is a price-taker.

    b.   The follower takes into account how the leader will react to its decisions.

    c. The leader maximises its profit subject to the follower’s reaction function.

    d. All of the above.

Answer 1

16) Option B. Price competition occurs because firms compete on prices and consumers are able to buy from the

seller with lowest price. Firm's size does not influence the pricing strategy and there are possibilities of collusion.

17) Option D. Follower can be one group all with firms behaving competitively against each other but strategically

against the leader. The leader takes up the reaction function of follower(s) and decides how much to supply based

on this decision.