Question

Suppose there are two identical energy firms EnergyCo1 and EnergyCo2 that behave as competitive duopolies in an energy supply market. Suppose their marginal cost is given by $12 and the market demand for energy is given by P=180-Q where Q represents the total quantity of energy brought to the market by the two firms and P is the price per unit of energy

1. what are the payoff and reaction functions of EnergyCo1 and EnergyCo2 in duopoly game? Plot the reaction function of the companies

2. suppose the two firms can choose to collude or not collude, present the payoff matrix of the normal form of a cooperative game between the two companies

3. Is there a dominant strategy for the firms, if yes, find it

4. Calculate the Cournot-Nash equilibrium of this game

5. If the two firms could collude, what is the collusion payoff and equilibrium

6. what capacity should each firm install in order to make the threat of punishing the other firm credible if it breaks the collusion agreement

7. Represent the game in the extensive form and determine if it exists, the sub-game Perfect Nash Equilibrium

Answer 1

The answer to 1,4 and 5 parts