Problem Set #5

December 1, 2013

Oligopoly in the smartphone market

Two firms are operating on the market for smartphones, Apple and Samsung.
Despite all their marketing eorts consumers are considering their products as
perfect substitutes. The maket demand for these homogenous cellphones is
Q = 60 2P. They are producing their cellphones with a unit cost of 10 dollars.

2 points

1. How much would be the production, the market price, and the profit of
Apple if it was a monopolist producer of smartphones?
Inverted demand is P = 30
Q = 20, P = 20.

1
2 Q.

M R = 30

Q = M C = 10. From this

1 point 2. What would be the market equilibrium if the two firms collude?

The two firms are gonna produce the same amount a monopolist would
do. So Q = qA + qS = 20 and P = 20.

3. Assume that the two firms are competing in a Cournot fashion.

3 points

(a) What are the reaction functions of the two companies.

Profit of firm i:

1
1
maxi = 30
qi
qj qi 10qi
qi
2
2
FOC:
30

qi

1
qj
2

qi = 20

10 = 0
1
qj .
2

(b) What are the equilibrium outputs, the price and profit levels.
Solving the system of the two reaction functions
qA = 20

2 points

1
qS and qS = 20
2

1
qA ,
2

40
We get qS = qA = 40
3 ' 13.33. The price is P = 30
3 =
50
40
800
and profits are A = S = 3
10 3 = 9 ' 88.89.

50
3

' 16.67,

4. Assume that they are a Stackelberg duopoly, where Samsung is the leader.

2 points

2 points

(a) What is the reaction function of Apple?

The same as before qA = 20 12 qS .
(b) What are the equilibrium quantities, price, and profit levels?

1
1
maxS = 30
qS
qA qS 10qS
qS
2
2

1
= 20
qS qS 10qS
4
FOC:
1
20
qS 10 = 0.
2
So qS = 20, qA = 10 and P = 15. The profits are S = (15 10)20 =
100, and A = (15 10) 10 = 50.
5. Now assume, that Samsung is still the Stackelberg leader, but the Federal Trade Commission has imposed a fine of 5 dollars per units sold on
Samsung for violating Apples patent rights. What are the equilibrium
quantities, price, and profit levels?
maxS =
qS

=
FOC:

1
qA qS (10 + 5) qS
2

1
qS qS 15qS .
4

1
qS
2

30
20

1
qS 15 = 0.
2
So qS = 10, qA = 15, and P = 17.5. The profits are S = (17.5
25 and A = (17.5 10) 15 = 112.5.
20

15)10 =

6. Instead of a fine imposed previously the FTC wants to impose a fine which
sets the quantities of the two companies equal? Calculate this fine, the
outputs and the equilibrium price.
maxS =

2 points

qS

FOC:

1
qS
2

30

1
qA qS
2

(10 + t) qS

1
qS 10 t = 0.
2
From this and the reaction function of Apple we get that:
20

qS = 20
If they are equal, then t =
50
3 ' 16.67.

10
3

2t, qA = 10 + t.
' 3.34, qS = qA =

40
3

' 13.33 and P =

Airplane manufacturers game

Let there be two firms producing air-planes in the world: Boeing and Airbus.
Each firm is trying to determine how much to produce given the following payos.

Boeing

Airbus
Produce
5,-20
0,100

Produce
Not produce

Not produce
125,0
0,0

1 point 1. What is the Nash equilibrium?

The only NE is (P, N ) .

2. The E.U. decides to support Airbus with a subsidy of $25, which is provided only if Airbus produces. Find the new Nash equilibrium.
In this case the matrix of the game is the following:

1 point
Boeing

Produce
Not produce

Airbus
Produce
5,5
0,100

Not produce
125,0
0,0

The only NE is (P, P )

3. Is this policy ecient? Why or why not?

2 points

This policy is inecient since, the payos of Boeing and Airbus are 5 and
the E.U. Commission pays 25, so the joint welfare is -15, instead of 125
which we would obtain by (P, N ) .

Entry game

Let there be two firms in the market that are playing an entry game: Walmart
and Mom &Pop. their payo matrix is the following:

Walmart

2 points

Mom &Pop.
Enter Not enter
Enter
X,-10
20,0
Not Enter
0,20
0,0

1. Find a value of X such that Walmart has a dominant strategy to enter the
market.
If X > 0, then Enter is a dominant strategy for Walmart since it pays o
to play Enter whatever Mom &Pop. does.

2. What is the Nash equilibrium in this case?

1 point

In this case the only NE is (Enter, Not enter), so only Walmart enters the
market.
3. The local city government wants to deter Walmart from entering the market and imposes a tax on Walmart if it enters, such that X = -2. Find the
new Nash equilibria. Is the government successful? Explain your answer.

1 point

In this case there will be multiple equilibria, both (Not enter, Enter) and
(Enter, Not enter) are Nash equlibria. The government is not necessarily
successful since (Enter, Not enter) is still an equilibrium.

Externalities in agriculture

The demand for genetically modified wheat is Q = 600 2P (in tonnes), and
the constant marginal cost of wheat is 30 dollars/tonnes. On the other hand,
the production of GMO wheat imposes external cost on local organic producers,
because their fields can be infected by the GMO seeds. This social cost is an
additional 10 dollars per tonne of GMO wheat.
1. Assume that the GMO market is perfectly competitive, so the inverted
supply is equal to the marginal cost. What is the market equilibrium?
Represent it in a graph.
In this case the equilibrium condition is P = M C = 30. So Q = 600 60 =
540.

2 points

2. How much is the consumer and producer surpluses and the deadweight
loss? Show them in your graph.

2 points

Consumer surplus is A + B + C = 270540

= 72900, producer surplus is 0,
2
and cost for the society is B + C + D = 5400. So the DWL is D = 100.

2 points

2 points

3. What is the optimal tax which should be levied to correct the externality?
The optimal tax is 10 per unit since it shift the MC to the social MC curve
(dashed line at 40). The optimal Q = 520.
4. Assume that the genetically modified wheat is produced by a monopolist.
How much is the output of the monopolist? Is the production of the
monopolist is under or above the socially optimal output? Is is a good
idea to tax this firm?
The equilibrium condition is M R = 300 Q = M C = 10. So QM =
270, P M = 165. This quantity is way smaller, than the socially optimal
amount so it would be bad to tax the monopolist, it is producing too less
already.