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Consider a duopoly model where two firms compete in their prices sequentially. Denote firm 1's price by p1 and firm 2's price by p2. Every firm has a constant marginal cost c > 0 but no fixed cost. Demand functions faced by the two firms are, respectively,
q1 = a - p1 + p2 and q2 = a - p2 +p1, where a>0
(a) Find the subgame perfect equilibrium outcome. What are firms' strategies in this subgame perfect equilibrium?
(b) Construct a Nash equilibrium where the two firms set the same price, provide firms' strategies to support this Nash equilibrium, and show that this Nash equilibrium is not subgame perfect.
Is the output produced sufficient to cover the factors of production when production is under: i) constant returns to scale (CRTS), ii) increasing returns to scale (IRTS) and iii) decreasing returns to scale (DRTS)?
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the monopoly will experience a loss the monopoly will earn a profit the monopoly will earn zero profit consumers will be worse off than they would be if the firm's profit maximization activities were unregulated
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