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.

please explain answers.

Answer 1

Ans1) the correct option is 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.

since the product is homogeneous and there are no consumer search costs. Firms compete by setting prices simultaneously so firms do not have market power and collusion is possible

ans2) the correct option is d.   All of the above.

In Stackelberg Model, a leader firm chooses its quantity first, taking the reactions of follower firms into account, and other follower firms independently choose their quantities.