Reference no: EM132421845

a.) The only way to succeed in a market with homogeneous products is to produce more efficiently than most firms. Comment on this statement. Does this imply that efficiency is less important in oligopoly and monopoly markets?

b.) Assume there are three firms (i = 1,2,3) competing in an industry and all three firms have the same marginal costs of £190 per unit. Market demand is given by P = 880 - Q.

(i) Under Bertrand competition, what prices will the firms charge? What would be the level of profits?

(ii) What price level and profits could the firms achieve through cooperative pricing?

(iii) Assume that the firms make pricing decisions on a weekly basis and that the firms use a 0.25% weekly discount rate. The current market price is £270, but firms 1 and 2 wish to raise their prices to the monopoly price (PM). Should firm 3 follow suit?

c) Suppose that you were trying to determine whether the leading firms in the automobile manufacturing industry are playing a tit-for-tat pricing game. What real world data would you want to examine? What would you consider to be evidence of tit-for-tat pricing? How can you distinguish tit-for-tat pricing designed to sustain "collusive" pricing from competitive pricing?

d.) The inverse demand curves and marginal costs (ci) for two firms (i = 1,2) are given by: Q1 = 73 - 5.8P1 + 3.2P2 ; c1 = £7.30 Q2 = 59 - 8.4P2 + 2.3P1 ; c2 = £6.10

(i) Use the Bertrand model with differentiated products to compute each firm's profit maximising price as a function of its guess about its rival's price. What are the equilibrium prices?

(ii) If these were homogenous firms, with marginal costs of £6.60 per unit and market demand given by P = 90 - Q, what prices would the two firms charge? What would be the level of profits?