PROBLEM 1
Suppose two firms, say F1 and F2, are duopolists competing in pharmaceutical industry producing
antibiotics. Each period F1 produces q1 antibiotics and F2 produces q2 antibiotics, and the firms face a
demand curve of P = 50 – 2QT, where QT = q1+q2. Both firms have a cost function of C(qi) = 10 + 2qi.
a. Find the equilibrium price, and quantities produced by each firm for this market! What are the
equilibrium profits when the market operates for a single period?
b. Suppose the two firms agree to maximize joint profits rather than individual profits and share the
production equally. How many antibiotics does each firm agree to make and what is the price level?
What are firms profits for a single period?
c. Explain graphically the Nash equilibrium in point a, and compare with the cooperative equilibrium
in point b! What can you conclude, explain!
PROBLEM 2
In a Stackelberg duopoly, one firm is a ‘leader’ and one is a ‘follower’. Both firms know each other’s costs
and market demand. The follower takes the leader’s output as given and picks his own output accordingly
(i.e., the follower acts like a Cournot competitor). The leader takes the follower’s reactions as given and
picks his own output accordingly. Suppose that firms 1 and 2 face (inverse) market demand p=100−(q1+q2).
Firm costs are c1=10q1 and c2=q22.
a. Calculate market price and each firm’s profit assuming that firm 1 is the leader and firm 2 the
follower!
b. Do the same assuming that firm 2 is the leader and firm 1 is the follower!
c. Which firm prefers to be the leader? Which firm prefers to be the follower?
d. If each firm assumes what it wants to be the case in part (c), what are the equilibrium market price
and firm profits?
e. Do you think your answer in (c) still applies if both firms has the same cost function? Provide your
arguments!
PROBLEM 3
Duopolists producing substitute goods q1 and q2 face inverse demand schedules:
𝑝1 = 20 + ½ 𝑝2 − 𝑞1 and 𝑝2 = 20 + ½ 𝑝1 − 𝑞2
respectively. Each firm has constant marginal costs of 20 and no fixed costs. Each firm is a competitor in
price, not quantity.
a. Write down each firm’s profit maximization condition!
b. Write down their best response function and put it in a graph!
c. Compute the equilibrium in this market, giving equilibrium price and output for each good. What
can you conclude on behavior of the duopolists?
PROBLEM 4
Suppose two firms produce two differentiated products and compete as price setting duopolist. The
(inverse) demand function for each good is given as:
𝑞1 = 45 −2𝑝1 + 𝑝2
𝑞2 = 45 + 𝑝1 − 2𝑝2
Assume that each firm has ZERO marginal cost of producing the good.
1. Suppose the two firms compete in a one-shot market game
a. Find the best response function for both firms
b. Find Bertrand Nash equilibrium of this game
2. Suppose now, they compete in a dynamic market game when firm 1 move first
a. Find quantity produced and profit of each firm.
b. Is there any advantage of being first mover? Explain!
