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Two firms compete by setting prices of identical products. Consumer purchase from whichever firm offers the lowest price. Market demand is given by P 300-Q (a) If MCA 100 and MCB 100, briefly explain why the Nash equilibrium is where both firms set b) Suppose the firms have different marginal costs (e.g., MCA 90, MC 100). What is the Nash (c) Return to case (a) in which both firms have identical marginal cost, but the firms compete agairn price equal to marginal cost. equilibrium in this situation? and again. The firms' discount factors are 0.75 Explain whether it would be possible for the firms to tacitly collude such that they both charged the monopoly price. If so, how would they collude. If not, why not? d) Would your answer to part (c) change if a firm could deviate for three periods before it was detected?
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