Bertrand model and stackelberg equilibrium

Reference no: EM1316069

Firms in some industries with a small number of competitors earn normal economic profit. The Wall Street Journal (Lee Gomes, "Competitors Lives On in Just PC Sector," March 17, 2003, B1 reports that the computer graphics chips industry is one such market. Two chip manufacturers, nVidia and ATI, "both face the prospect of razor-thin profits, largely on account of other's existence."

a. Consider the Bertrand model with no product differentiated in which each firm has a positive and fixed sunk cost F and zero marginal cost. What are the equilibrium prices and profits? Illustrate your result on a proper diagram.

b. Assume that nVidia and ATI produce differentiated products and are Bertrand competitors. The demand for nVidia's chip is Q_V = 2 - 3P_V + P_A, the demand for ATI's chip is Q_A = 2 - 3P_A + P_V, where P_V is nVidia's price, P_A is ATI's price. Suppose each manufacturer's marginal dost is constant at $1 and fixed sunk cost is zero. What are the equilibrium prices, quantities and profits in this market? Does "razor-thin" profit result imply that two manufacturers necessarily produce chips that are nearly perfect substitutes? Explain.

c. Now consider a more general version of the model where the demand for nVidia's chips is Q_V = α - βP_V + γP_A; the demand for ATI's chips is Q_A = α - βP_A + γP_V, and the marginal cost of each firm is given by m and fixed sunk cost is zero. What must be the relationship between α, β, γ and m so that each firm makes zero profits even though they produce differentiated products.

d. Determine the Stackelberg equilibrium with one leader firm and n follower firms if the market demand curve is linear and each firm has a constant marginal cost, m, and no fixed cost.

Reference no: EM1316069

Questions Cloud

Estimate the probability using bayes theorem : If a single test is run and indicates that oil is present, what is the revised probability that oil is actually present?

Computation of the financial performance of the company : Computation of the financial performance of the company with the help of the ratios and industry average

Valuation of stock through growth model : Valuation of stock through growth model - Are the PVGO figures correlated with the analyst estimated EPS growth rates? Would you think these two "growth" metrics should be correlated? Why or why not?

Suppose there is no cyclical component : Suppose there is no cyclical component. Quarterly billing for water usage is shown below describe summer billing for year 5.

Bertrand model and stackelberg equilibrium : Consider the Bertrand model with no product differentiated in which each firm has a positive and fixed sunk cost F and zero marginal cost. What are the equilibrium prices and profits? Illustrate your result on a proper diagram.

Find the expected value using tree diagram : What should ING's General Counsel do to minimize ING's expected costs?

Find out the possibility for binomial distribution : Risks and Odds in Everyday Life, James Burke claims that about 70 percent of all single men would welcome a woman taking the initiative in asking for a date. A random sample of 20 single men was asked if they would welcome a woman taking the initiati..

Valuation of stock through roe : Short Description: Valuation of Stock through ROE and Calculate an estimate of MCD's ability to grow its EPS based on your answer to parts a) and b).

Expected value and probability values : How much would ING be willing to pay if the General Counsel could arrange for an absolutely reliable mock trial?

User Account

All Pages