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Unformatted text preview: ECON 468: Industrial Organization Problem Set 3 Due date: April 22th 2008 April 8, 2008 1. Consider a linearcity market in which 2 firms are located at the opposite end of the line: Figure 1: Linear city with two stores G 1 and G 2 G 1 = 0 x G 2 = 1 We know that in this market the demand functions at each store are given by: D 1 ( p 1 ,p 2 ) = p 2 p 1 2 t + t 2 D 2 ( p 1 ,p 2 ) = p 1 p 2 2 t + t 2 Consider the following twoperiod game: • In period 1, Firm 1 can reduce its marginal cost by investing in research and development. • In period 2, both firms compete in prices (i.e. Bertrand game with product differentita tion). The cost function of the two firms is given by: C 1 ( q ) = ( c x ) q C 2 ( q ) = cq where x is the result of the investment made in period one. The cost of reducing marginal cost by x is given by: g ( x ) = 1 2 x 2 . (a) Given an arbibtrary value for x , what are the equilibrium profits of both firms in the second stage of the game?...
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 Spring '08
 HOUDE
 Economics, Perfect Competition, k2, production level K1, total production K1

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