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    Eco380 A2 Q1

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    rachelyuningliu
    This document discusses a Bertrand competition model between two firms, Tub and H&R Block, that provide homogeneous services. The key points are: 1) Since the firms have identical and constant marginal costs, the unique Nash equilibrium is for both firms to set price equal to marginal cost. 2) For this duopoly game with no capacity constraints, the Nash equilibrium price is for both firms to set price at the marginal cost of $10. 3) If one firm raises price above $10, the other will undercut to earn more profits, ensuring the price remains at the $10 equilibrium. Therefore, there is no profitable deviation from the Nash equilibrium price.

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    Eco380 A2 Q1

    Uploaded by

    rachelyuningliu
    3 views2 pages
    This document discusses a Bertrand competition model between two firms, Tub and H&R Block, that provide homogeneous services. The key points are: 1) Since the firms have identical and constant marginal costs, the unique Nash equilibrium is for both firms to set price equal to marginal cost. 2) For this duopoly game with no capacity constraints, the Nash equilibrium price is for both firms to set price at the marginal cost of $10. 3) If one firm raises price above $10, the other will undercut to earn more profits, ensuring the price remains at the $10 equilibrium. Therefore, there is no profitable deviation from the Nash equilibrium price.

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    ECO380 A2 Q1

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    This document discusses a Bertrand competition model between two firms, Tub and H&R Block, that provide homogeneous services. The key points are: 1) Since the firms have identical and constant marginal costs, the unique Nash equilibrium is for both firms to set price equal to marginal cost. 2) For this duopoly game with no capacity constraints, the Nash equilibrium price is for both firms to set price at the marginal cost of $10. 3) If one firm raises price above $10, the other will undercut to earn more profits, ensuring the price remains at the $10 equilibrium. Therefore, there is no profitable deviation from the Nash equilibrium price.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    3 views2 pages

    Eco380 A2 Q1

    Uploaded by

    rachelyuningliu
    This document discusses a Bertrand competition model between two firms, Tub and H&R Block, that provide homogeneous services. The key points are: 1) Since the firms have identical and constant marginal costs, the unique Nash equilibrium is for both firms to set price equal to marginal cost. 2) For this duopoly game with no capacity constraints, the Nash equilibrium price is for both firms to set price at the marginal cost of $10. 3) If one firm raises price above $10, the other will undercut to earn more profits, ensuring the price remains at the $10 equilibrium. Therefore, there is no profitable deviation from the Nash equilibrium price.

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    of 2

    Q1 Bertrand Competition

    a
    my
    TUB
    p1100 p 10100 p
    Foc 100
    sp 10 0
    P 55
    a too P 100 55 45
    Tu 5510345 2025

    b Since thetwocompanies produce homogeneous services


    thetwocompanies compete by choosing price simultaneously andsupply theirresultingdemand
    No capacityconstraint forthis question
    marginalcostis constantandsameforall firms MC c
    Thetwofirmsare playing a PureBertrand PricingGame
    theTheorem the onlyNash EquilibriumofthePure Bertrand PricingGame is
    Accordingto P P c
    WeknowthattheNashEquilibrium forthisduopoly game is Pa Pa 10
    Thus Tub Tun lo lo a 0
    profits are o
    forbothfirms
    Co Because
    ofperfectsymmetryofthe game wecan discussonlyoneside and theothersidefollowsthesamelogic

    on
    if Pa PB7 10then Bill's canincreaseprice tojustunderPit toearnmoreprofies Cut then H R willundercutand

    if PB
    PB Pa 10then Bill's is
    Pit 10 then
    andcanincreaseprofits byraising price
    makingnegativeprofits

    if profies
    forboth firmsarestill0 Not a profitabledeviation
    y
    if PB 10 Pit then Bill's is makingnegativeprofits andcanincreaseprofits byraising price

    Therefore thereis no profitable deviation fromtheNE in Cb

    d No Pit P 10 is nota NEanymore


    Suppose H R Block firstraises its price to 11
    Thenthedemand willshifttoBill's who hits its capacityconstraint 9 40
    Thentheresidual demand a 60 P HARBlockcanearnpositiveprofitsbyservingcustomerswho can'tbuyfromBill's
    becomes

    Forexample Pa 35 andPB 11 is a profitabledeviation as Tun 35 10725 625 Tu 11 1040 40

    e No Pa PB 10 isnot a NE
    Profitabledeviation
    P 50 P 50
    9 20 9 30
    TUB 150 10720 800 run 50 1030 81200

    f Yes This is a NE
    Sincethe capacity
    ofthetwofirms areverylow weknowthat in thepurestrategyNE bothfirmswill produce at
    capacityandmarketwill clear atsomepriceabove the marginalcost 10
    ForBill's theresidualdemand is a 70 P
    Bill's should chargethemonopolyprice inthisresidualmarket
    my Tu 70 91379 109

    FOC 60 29 O
    913 30
    However
    as Bill's capacity is at 20 thebest Bill's cando is to produce GB 20 and
    constrained

    charge PB 70 96 70 20 50 toachieve maximumprofits

    ForH RBlock theresidualdemand is a So P


    H R Block shouldchargethemonopolyprice in thisresidualmarket
    May Tu 8094 q 109h

    Foc 70 29 D
    q 35
    However as HERBlock's capacity is constrained at30 thebest theycando is to produce
    9 30 andcharge PH so 30 50 to achievemaximumprofits
    Therefore no profitabledeviation as shownabove

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