Microeconomics | EE 311 |
3. Two firms are in the chocolate market. Each can choose to go for the high end of the
market (high quality) or the low end (low quality). Resulting profits are given by the
following payoff matrix:
Firm 2
Low
High
Firm 1
Low
-20 , -30
900 , 600
High 100 , 800
50 , 50
a) What outcomes, if any, are Nash equilibria?
b) If the managers of both firms are conservative and each follows a maximin
strategy, what is the outcome?
c) What is the cooperative outcome? Which firm benefits most from the cooperative
outcome? How much would that firm need to offer the other to persuade it to
collude?
Microeconomics | EE 311 |
Solution:
1.a) The monopolists profits are maximized when MC = MR.
2
i (Pi AC
)Qi 53
Qi Q2
Qi Q2
i QiQj 5Qi 48
i QiQj
for i, j = 1, 2.
Microeconomics | EE 311 |
Q2 24 Q1 2.
leader to get
1 53
Q1 Q12 Q1 24 Q1 / 2 5Q1 24Q1 Q12 / 2
High since:
Microeconomics | EE 311 |
2.b)
Hig
h
Lo
Hi
30,30
Lo
50,35
gh
w
Hi
40,60
Lo
20,20
gh
w
Microeconomics | EE 311 |
2.c)
3.b)
Microeconomics | EE 311 |
200 (=
Firm