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How does critical value of discount factor depend on product

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Reference no: EM13874846

An industry consists of two firms. The demand function for the product of firm i is qi ( pi , p j ) = a - bpi + cpj .

The marginal cost of production for each firm is zero.

(a) Find the critical value of the discount factor that supports joint profit maximization with grim punishment strategies. [Hint: Let r = c/b, where 0 r 1.]

(b) How does the critical value of the discount factor depend on the degree of product dif- ferentiation r ? What does r = 1 imply about the relationship between the two goods? r = 0?

Reference no: EM13874846

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