Reference no: EM135360

In a market with annual demand Q = 250 - 2P, there are two firms, A and B, that make identical products. Because their products are identical, if one charges a lower price than the other, all consumers will want to buy from the lower-priced firm. If they charge the same price, consumers are indifferent and end up splitting their purchases about evenly between the firms. Each firm has capacity to produce up to 150 units per year and has an additional marginal cost of production of 15 per unit. Firms build capacity first and then set price for each year. No other firms can enter this market. Both firms know all of this information.

a. Given the capacities they have built, what is the single-period (one shot) Nash equilibrium price in this market now?

b. If the two firms could collude perfectly, what is the joint profit-maximizing price the two firms would charge?

c. Assume that each firm can monitor the other's price very closely and can respond instantly (before any consumers make a purchase decision) to a price change. Explain why one repeated-game Nash equilibrium is for both firms to charge the price you answered in (b).

d. If market demand were expected to decline starting next year and eventually disappear entirely, how would that affect the price that the firms could maintain today?