Reference no: EM132661448
The market for online textbooks is represented by the demand function P(Q) = 100-Q/6. The market is served by two identical firms, Allbooks (A) and Bestbooks (B), which compete à la Bertrand and share the same production technology, resulting in identical cost functions C(q_i) = 60q_i for i = A,B.
(1) Show that in equilibrium each firm sells 120 online textbooks. Find the equilibrium price and profits of each firm.
Following a technological innovation, A is able to reduce its cost to $40 per textbook sold.
(2) Show that in equilibrium only A is active. Find the equilibrium price, quantity sold and profits. Is there market power?
(3) Which price would A charge instead if the innovation made its cost fall to $10 per textbook sold?
(4) The fixed cost of acquiring the technology that reduces cost to $40 is $100, while the cost of acquiring the technology that reduces cost to $10 is $10,000. Which one should A invest in?
(5) If the firms were instead competing à la Cournot, what would happen to quantities and prices if the unit cost of A dropped to $40 while the cost of B did not change? Discuss (no derivations or computations needed).
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