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Assignment Oligopoly Solution: Everglow and Dimlit. They Have Identical Cost Functions

This document summarizes an economics assignment on oligopoly solutions and competitive strategies between two light bulb producers, Everglow and Dimlit. It also covers a product introduction game between two competing firms. 1. The assignment examines the equilibrium outcomes under perfect competition, Cournot competition, Stackelberg competition, and collusion between the light bulb producers. 2. The product introduction game matrix shows two pure strategy Nash equilibria where one firm introduces Product A and the other Product C. If both firms use maximin strategies, the outcome would be (A,A) with lower payoffs of (-10,-10). 3. If one firm uses a maximin strategy of A and the other firm

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89 views

Assignment Oligopoly Solution: Everglow and Dimlit. They Have Identical Cost Functions

This document summarizes an economics assignment on oligopoly solutions and competitive strategies between two light bulb producers, Everglow and Dimlit. It also covers a product introduction game between two competing firms. 1. The assignment examines the equilibrium outcomes under perfect competition, Cournot competition, Stackelberg competition, and collusion between the light bulb producers. 2. The product introduction game matrix shows two pure strategy Nash equilibria where one firm introduces Product A and the other Product C. If both firms use maximin strategies, the outcome would be (A,A) with lower payoffs of (-10,-10). 3. If one firm uses a maximin strategy of A and the other firm

Uploaded by

Prithviraj Chouhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ECO101A: Introduction to Economics

Assignment Oligopoly solution

1. Demand for light bulbs can be characterized by Q = 100 - P, where Q is in millions


of lights sold, and P is the price per box. There are two producers of lights:
Everglow and Dimlit. They have identical cost functions:
𝟏
𝑪𝒊 = 𝟏𝟎𝑸𝒊 + 𝑸𝟐𝒊 , (𝒊 = 𝑬, 𝑫); 𝑸 = 𝑸𝑬 + 𝑸𝑫
𝟐
a. Unable to recognize the potential for collusion, the two firms act as short-run
perfect competitors. What are the equilibrium values of QE, QD, and P? What are
each firm’s profits?

The other way to solve the problem and arrive at the same solution is to find the market
supply curve by summing the marginal cost curves, so that QM=2P-20 is the market supply.
Setting supply equal to demand results in a quantity of 60 in the market, or 30 per firm
since they are identical.
b. Top management in both firms is replaced. Each new manager independently
recognizes the oligopolistic nature of the light bulb industry and plays Cournot.
What are the equilibrium values of QE, QD, and P? What are each firm’s profits?
c. Suppose the Everglow manager guesses correctly that Dimlit has a Cournot
conjectural variation, so Everglow plays Stackelberg. What are the equilibrium
values of QE, QD, and P? What are each firm’s profits?

d. If the managers of the two companies collude, what are the equilibrium values of
QE, QD, and P? What are each firm’s profits?
2. Two competing firms are each planning to introduce a new product. Each will
decide whether to produce Product A, Product B, or Product C. They will make
their choices at the same time. The resulting payoffs are shown below.

We are given the following payoff matrix, which describes a product introduction
game:

a. Are there any Nash equilibria in pure strategies? If so, what are they?

There are two Nash equilibria in pure strategies. Each one involves one firm introducing
Product A and the other firm introducing Product C. We can write these two strategy
pairs as (A, C) and (C, A), where the first strategy is for player 1. The payoff for these
two strategies is, respectively, (10,20) and (20,10).

b. If both firms use maximin strategies, what outcome will result?

Recall that maximin strategies maximize the minimum payoff for both players. For
each of the players the strategy that maximizes their minimum payoff is A. Thus (A,A)
will result, and payoffs will be (-10,-10). Each player is much worse off than at either
of the pure strategy Nash equilibrium.

c. If Firm 1 uses a maximin strategy and Firm 2 knows, what will Firm 2 do?

If Firm 1 plays its maximin strategy of A, and Firm 2 knows this then Firm 2 would get
the highest payoff by playing C. Notice that when Firm 1 plays conservatively, the Nash
equilibrium that results gives Firm 2 the highest payoff of the two Nash equilibria.

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