Suppose you are one of the duopolists and you have estimated the market demand f

Question

Suppose you are one of the duopolists and you have estimated the market demand function: P = 500 – 5*Q. Marginal cost (MC) for both firms is constant at 80. You also know that your firm can easily expand output to 100 units, but you don’t know much about your competitor’s production capacity.

a.Provide a brief comment on your possible options and risks in this duopoly situation!

b.Currently you and your duopoly competitor are in the Cournot-Nash equilibrium – both producing 28 units of output and selling at the price of 220. Suppose that your competitor (the other duopolist) threatens to start a terrible price war, but you suddenly find out that your competitor cannot expand the production capacity beyond 30 units. Would that change your strategy in this market? How? Please, explain briefly!

Explanation / Answer

a )

b)

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