Derive the critical discount factor where collusion is

Assignment Help Business Economics

Reference no: EM133037317

Question: Two firms, one and two, produce a homogeneous good at zero marginal cost. Demand in each period is D = 10A - 5p. Firms meet in the market repeatedly and expect to do so into the infinite future. They maximize present discounted profits. The discount factor is δ < 1. Study an equilibrium in which the firms use a grim-trigger strategy.

a) Suppose first that firms compete in prices. Derive the critical discount factor where collusion is an equilibrium.

b) How does the critical discount factor varies if deviations are only detected with probability Derive the new critical discount factor where collusion is an equilibrium.

c) Suppose then that firms compete in quantities. The probability of detection of a deviation is back to one. Derive the critical discount factor where collusion is an equilibrium. Is collusion more or less likely than in a)?

d) There are now 71 firms in the market that compete in quantities. Generalise the critical discount factor to be a function of 71 firms. Known that the critical discount factor in case of price competition ie δ_cv = 1 - 1/n. Plot the critical values against the number of firms, n, and determine whether, for all n, the critical value of one mode of competition exceeds the other.

Reference no: EM133037317

Questions Cloud

What are the proportions of your investment in each stock : You want to form a portfolio of two stocks, A and B, and you require an expected return of 12%. What are the proportions of your investment in each stock

Attributes of the contingency theories of leadership : Key attributes of the contingency theories of leadership. Key differences between transformational and transactional leadership

Develop a strategy for producing financial statements : Develop a strategy for producing financial statements including income statements, balance sheet, statement of retained earnings, and cash flow

What is the value of the target firm to the acquiring firm : Question - Firm X plans to acquire Firm Y. Firm X has yearly after-tax cash flows of RM 80 million, what is the value of the target firm to the acquiring firm

Derive the critical discount factor where collusion is : Derive the critical discount factor where collusion is an equilibrium and Plot the critical values against the number of firms, n, and determine whether

Who are the parties that are directly affected : Gary Watson, a graduating business student at a small college, is currently interviewing for a job. Who are the parties that are directly affected

Intellectual property interdependent indicators : Use at least ten of these vocabulary terms to write an essay on globalization and the benefits and drawbacks of a global economy. fiat money money supply budget

What is its weighted average cost of capital : The dividend yield is 6.5%. The company also has $24,000,000 of bonds (also sold at par) with a coupon rate of 5%. What is its weighted average cost of capital

What amount of transaction price the company allocate : What amount of the transaction price would the company allocate to its performance obligation to provide the needed services to the customer

User Account

All Pages