1. Suppose there are two firms, A and B, operating in a market and compete on output choices (QA and QB). No other firms can enter the market. Suppose further that the market demand curve is:
P (price) = 24800 – 200(QA+QB)
Further, suppose that the marginal costs for both firms is constant and equal to $800, and there are no fixed costs.
a. Calculate and draw each firms best response function. Put QA on the Y axis and QB on the X axis.
b. Solve for the Nash Equilibrium output levels for each firm, and calculate the market price and the corresponding economic profits for each firm. Identify this point on the graph you drew in part a.
c. Suppose instead that the firm’s colluded and acted like a single monopolist. So the market demand curve is now: P = 24800 – 200Q where Q = QA+QB. Assume that MC (marginal cost) = $800. Calculate the profit maximizing market output and price levels. Assume that each firms produces half of the market output and splits evenly the monopoly profit. What are the output and profit levels for each firm?
d. (Suppose firm A believes that firm B will produce the output level identified in part c. Is it optimal for firm A to produce their output level identified in part C, or would there be another output level for firm A to maximize their own profits? Hint: Use your work in part A.
e. Given all this work, is this game a prisoner’s dilemma? Explain fully.
2. I remember when Amazon was a cute little start-up designed to compete with rival booksellers Barnes and Noble and Borders…. Please read the article linked below. Using the work done in this module together with the information in the article, please answer this question:
In your well informed opinion, to what degree (if at all) should we regulate Amazon? Why?
https://www.vox.com/recode/22836368/amazon-antitrust-ftc-marketplace
