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Industrial Organization- BCOR 310SPRING 2015Professor: Brahim Guizani

Problem Set 1

1. Discussion questions

a. Explain why collusive pricing is difficult in one-period competition and easier when firms interact over a number of periods.

Collusive Pricing is Difficult in one period than in a number of periods as collusion is about fixing prices regarding that both firms should respect some standers as setting a price P=PM

As collusion price in one period the two forms cannot stabilize the standers or detect cheating because they cannot anticipate future actions as it is more important than present actions cause prices are fixed during one period in contrast to a number of periods

b. In which of the following industries would you expect price collusion to be easier to maintain? Explain your reasoning.1. Steel or ready-to-eat cereals.2. Hotels or crude oil production3. Glass containers or fast food.

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2. Problems

I. Suppose a duopoly faces an industry demand curve of P = 100 – Q

Pi = 100 – 2qi fori = 1, 2.

The firms, however, face the following different marginal costs:

mc1 = 10 + 2q1 and mc2 = 22 + 2q2

i. If both firms charge the same price, what is Firm 1’s preferred price?

ii. If both firms charge the same price, what is Firm 1’s preferred price?

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iii. What is the joint profit-maximizing price? How much output would each firm produce it it charged the joint profit-maximizing price?