Oligopoly &

Monopolistic Competition
Exercises
Cournot Oligopoly
1. What is the homogeneous-good duopoly’s Nash-Cournot equilibrium if the market
demand function is Q = 200 – p and each firm’s marginal cost is $5 per unit?
2. Duopoly quantity-setting firms face the inverse market demand function
p = 80 – 0.5 (q1 + q2). Each firm has a marginal cost of $20 per unit. What is the Nash-
Cournot equilibrium?
3. In a homogeneous-good Cournot duopoly where both firms have a constant marginal
cost m and the inverse market demand function is p = a – bQ, show that the Nash-
Cournot equilibrium output of a typical firm is q = (a – m)/3b. Show that the
corresponding equilibrium price is p = (a + 2m)/3.
4. A homogeneous-good duopoly faces an inverse market demand of p = 38 – Q. Firm 1
has a constant marginal cost of MC1 = 4. Firm 2’s constant marginal cost is MC2 = 6.
Calculate the output of each firm, market output, and price for (a) a Nash-Cournot
equilibrium or (b) a collusive equilibrium at the monopoly price.
Cournot Oligopoly
5. Firms 1 and 2 produce differentiated goods. Firm 1’s inverse demand function is
p1 = 120 – 2q1 – q2, while Firm 2’s inverse demand function is p2 = 120 – 2q2 – q1.
Firm 1 has a constant marginal cost of 24 and Firm 2 has a constant marginal cost
of 36. What is the Nash-Cournot equilibrium in this market?
6. To examine the trade-off between efficiency and market power from a merger,
consider a market with two firms that sell identical products. Firm 1 has a
constant marginal cost of 2, and Firm 2 has a constant marginal cost of 4. The
inverse market demand function is p = 30 – Q.
a. Solve for the Nash-Cournot equilibrium price, quantities, profits, consumer surplus, and
deadweight loss.
b. If the firms merge and produce at the lower marginal cost of 2, how do the equilibrium
values change?
c. Discuss the change in efficiency (average cost of producing the output) and total surplus –
consumer surplus, producer surplus (or profit), and deadweight loss.
Bertrand Oligopoly
7. In an initial Nash-Bertrand equilibrium, two firms with differentiated products
charge the same equilibrium prices. A consumer-testing agency praises the
product of one firm, causing its demand curve to shift to the right as new
customers start buying the product. (The demand curve of the other product is
not substantially affected.) Use a graph to illustrate how this new information
affects the Nash-Bertrand equilibrium. What happens to the equilibrium prices
of the two firms?
8. Suppose that identical duopoly firms have constant marginal costs of $10 per
unit. Firm 1 faces a demand function of q1 = 100 - 2p1 + p2, where q1 is Firm 1’s
output, p1 is Firm 1’s price, and p2 is Firm 2’s price. Similarly, the demand
function Firm 2 faces is q2 = 100 - 2p2 + p1. Solve for the Nash-Bertrand
equilibrium.
Monopolistic Competition
9. Consider a firm operating in a monopolistic competition market with the
following cost function: C = 100 + q2. This firm faces in the short run a demand
function equal to p = 48 – 3q. In the long run this function it moves in parallel as
a result of the behaviour of competing companies. Determine the firm's optimal
choices: a) in the short term; b) in the long run.