Oligopoly%26GameThpbms - Page 1 Ignore question 3 1. Two...

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Page 1 Ignore question 3 1. Two large diversified consumer products firms are about to enter the market for a new pain reliever. The two firms are very similar in terms of their costs, strategic approach, and market outlook. Moreover, the firms have very similar individual demand curves so that each firm expects to sell one-half of the total market output at any given price. The market demand curve for the pain reliever is given as: Q = 2600 - 400P. Both firms have constant long-run average costs of $2.00 per bottle. Patent protection insures that the two firms will operate as a duopoly for the foreseeable future. Price and quantities are per bottle. If the firms act as Cournot duopolists, solve for the firm and market outputs and equilibrium prices. 2. Lambert-Rogers Company is a manufacturer of petro-chemical products. The firm's research efforts have resulted in the development of a new auto fuel injector cleaner that is considerably more effective than other products on the market. Another firm, G.H. Squires Company, independently developed a very similar product that is as effective as the Lambert-Rogers formula. To avoid a lengthy court battle over conflicting patent claims, the two firms have decided to cross-license each other's patents and proceed with production. It is unlikely that other petrochemical companies will be able to duplicate the product, making the market a duopoly for the foreseeable future. Lambert-Rogers estimates the demand curve given below for the new cleaner. Marginal cost is estimated to be a constant $2 per bottle. Q = 300,000 - 25,000P. where P = dollars per bottle and Q = monthly sales in bottles. a. Lambert-Rogers and G.H. Squires have very similar operating strategies. Consequently, the management of Lambert-Rogers believes that the Cournot model is appropriate for analyzing the market, provided that both firms enter at the same time. Calculate Lambert- Rogers' profit-maximizing output and price according to this model. b. Lambert-Rogers' productive capacity and technical expertise could allow them to enter the market several months before Squires. Choose an appropriate model and analyze the impact of Lambert Rogers being first into the market. Should Lambert-Rogers hurry to enter first?
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Page 2 3. University Bookstore competes with Campus Bookstore in the textbook market. Since University Bookstore is on campus, they have "first-move" advantage. The bookstores compete by setting price. The demand function for University Bookstore is q U = 12,000 - 80 P U + 60 P C . The demand function for Campus Bookstore is q C = 12,000 - 80 P C + 60 P U . Campus Bookstore's marginal revenue function is: MR C ( P C , P U ) = 12,000 - 160 P C + 60 P U . Campus Bookstore's marginal cost is:
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This note was uploaded on 08/25/2009 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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Oligopoly%26GameThpbms - Page 1 Ignore question 3 1. Two...

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