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Suppose two identical firms are in Bertrand Competition with the following market demand and marginal costs...

Suppose two identical firms are in Bertrand Competition with the following market demand and marginal costs P = 124 − 6Q MC = 4

1 Assuming both firms collude what would the price, quantities and (one period) profits be?

2 Assume both firms are colluding to raise the equilibrium price. If one firm defected from (i.e. broke) their agreement how much would they earn? (Assume the game was played once.)

3 Now assume the game is infinitely repeated and the discount rate is eight percent. Is collusion a Nash equilibrium? Why or why not?

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