Question

QUESTION 1

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 2

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.

what is the answers to question 1 and 2? can you explain? thank you

Answer 1

1. d.   All of the above.

Betrand model is a model in which there is price competition between firms. They do not collude and consumer is able to switch from one to another as there is low or no transportation cost. Firms are huge in size.

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

Under Stackelberg model, leader uses the reaction function of follower and maximizes its profit. Follower is a firm which follows leader to set price.