Question

QUESTION 4

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 5

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

Q4)option d)

Since in Bertrand duopoly, two firms , which can be large firms, but compete in prices only.& They can have market powers.

A price war between the two firms leads to the conclusion that each firm has to charge price equals to MC at equilibrium.

Assuming no switching costs, a consumer will buy from the lowest cost firm.

In Bertrand-Nash eqm, collusion should not be possible otherwise it will become a cartel.

Q5)

Option c)

Since in stackelberg game, the leader moves first , anticipating the possible moves of the follower.so the goal of leader is to maximize its profits subject to the reaction function of the follower..

Thus it's the leader, who takes into account how follower will react to its decisions, so option b is false.

Option a is wrong , no need of assumption that follower is price taker .it can be a single firm with well defined market power.