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Unformatted text preview: INDUSTRIAL ORGANISATION - Problem set 2 Semester 2, 2010 1 Problem set 2 1. Suppose two firms compete in the market for Glonks. Each firm is debating their pricing strategy. Firms simultaneously decide whether to set a “high” price or a “low” price. The high price is close to the monopoly price. If both firms choose this price, profits are high for each firm. If only one firm chooses the low price, that firm captures the entire market, earning even higher profits, while the other firm loses all of their customers. Finally, if both firms set the low price, profits are modest for both firms. (a) Write out a game in normal form that describes this competitive situation. (b) Identify any dominant strategies in the game you have written. (c) Identify any Nash equilibria to your game. (d) Are there any similarities to any of the games we have studied in class? Explain briefly. 2. Two firms engage in quantity (Cournot) competition. Demand is given by P ( Q ) = a- Q , where a is a constant. Firmis a constant....
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- Three '10
- Economics, Firm