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Unformatted text preview: INDUSTRIAL ORGANISATION - Problem set 3 Semester 2, 2010 1 Problem set 3 1. In class we discussed a couple of critical features we would need to see in a market to generate price cycles similar to the Edgeworth model. Discuss briefly whether you think each of the situations below is conducive to price cycles. Do not attempt to solve a model to answer this question, just provide the intuition. 1 In each market, firms set prices simultaneously, have constant marginal costs, and have no fixed costs. (a) In market A, there are two firms. 30% of customers really like Firm 1s product and will not consider buying Firm 2s product under any circumstances. 30% of customers really like Firm 2s product and will not consider buying Firm 1s product under any circumstances. The remaining customers perceive Firm 1s and Firm 2s products to be identical. Firms face no capacity constraints. (b) In market B, there are three firms. Each firm produces an identical product. Each firm has equal capacity and is unable to serve the whole market if they set a price equal to marginal costs. [However, at the monopoly price, each firms capacity is sufficient to serve the entire market.] (c) In market C, there are two firms. All customers consider Firm 1s and Firm 2s products to be imperfect substitutes. Firms face no capacity constraints....
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- Three '10