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Calculate equilibrium prices-calculate equilibrium profits

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Two firms compete in prices. In the first stage, firm 1 chooses its price. In the second stage, after observing the price chosen by firm 1, firm 2 chooses its price. Production costs are zero. The demand functions are given by y1 = (2/3)(1 - 2 p1 + p2 ) y2 = (2/3)(1 - 2 p2 + p1).

a) Calculate equilibrium prices.

b) Calculate equilibrium quantities.

c) Calculate equilibrium profits.

d) In this model, is there a first mover advantage or a second mover advantage? Why?

e) Suppose firms form a cartel and choose prices to maximize joint profits (you can assume that prices are chosen simultaneously). Find equilibrium prices.

f) Intuitively, if firms were to merge (and choose prices simultaneously), how would prices differ from your answer in part (e)?

Reference no: EM132414843

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