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Analysis of cournot duopoly model

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Reference no: EM1316074

Consider a homogenous-product Cournot duopoly model in which Q is the market output, P is the price, and qA and qB are the output levels produced by firms A and B, respectively. The inverse market demand function is

P = 250 - 2Q.

The marginal cost is constant and equal to $10 for both firms.

a. Determine the best-response function for each firm. Draw a diagram showing the two best-response functions.

b. Calculate each firm's equilibrium output and the equilibrium market price (use two decimals).

c. Determine the level of output and the price that prevail under a Bertrand duopoly. What is the "Bertrand trap"?

d. Determine the level of output and the price that prevail under a Stackelberg duopoly in which firm A is the leader and firm B is the follower.

e. Determine the collusive output and price levels.

f. Calculate the profit of each firm in each of these settings. Compare the output levels, prices, and profits in settings characterized by Cournot, Bertrand, Stackelberg, and collusive behavior. Show the Cournot, Stackelberg, and collusive equilibria on the diagram.

Reference no: EM1316074

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