Suppose there are two firms producing DVD players. The average total cost and marginal cost of producing DVDs are the same for both firms, and are such that only two firms can exist in the industry. These cost curves are shown in Figure 1. The smallest production facility that can be built is with a minimum efficient scale of 350 DVDs. Figure 2 shows the marginal cost, demand and marginal revenue in the entire industry. Study both graphs and answer the questions below. (a) At the competitive solution, how many DVDs will be produced? What is the profit in the entire industry and for each firm?
(b) If both firms collude and form a joint monopoly, how many DVDs will be produced? What is the profit in the entire industry and for each firm?
(c) If one firm decides to cheat and produce 100 more DVDs, the market price of a DVD drops to $90. Note that, according to Fig. 1, by doing this, the ATC for the cheating firm decreases to $80. Should the firm cheat?
(d) Construct the payoff matrix of strategic pricing for each firm, and identify the optimal strategy of each firm, assuming that both firms cannot detect cheating.

Question

Suppose there are two firms producing DVD players. The average total cost and marginal cost of producing DVDs are the same for both firms, and are such that only two firms can exist in the industry. These cost curves are shown in Figure 1. The smallest production facility that can be built is with a minimum efficient scale of 350 DVDs. Figure 2 shows the marginal cost, demand and marginal revenue in the entire industry. Study both graphs and answer the questions below.  (a) At the competitive solution, how many DVDs will be produced? What is the profit in the entire industry and for each firm?
(b) If both firms collude and form a joint monopoly, how many DVDs will be produced? What is the profit in the entire industry and for each firm?
(c) If one firm decides to cheat and produce 100 more DVDs, the market price of a DVD drops to $90. Note that, according to Fig. 1, by doing this, the ATC for the cheating firm decreases to $80. Should the firm cheat?
(d) Construct the payoff matrix of strategic pricing for each firm, and identify the optimal strategy of each firm, assuming that both firms cannot detect cheating.

Quizplus · Accepted Answer

The Answer of Suppose there are two firms producing DVD players. The average total cost and marginal cost of producing DVDs are the same for both firms, and are such that only two firms can exist in the industry. These cost curves are shown in Figure 1. The smallest production facility that can be built is with a minimum efficient scale of 350 DVDs. Figure 2 shows the marginal cost, demand and marginal revenue in the entire industry. Study both graphs and answer the questions below.  (a) At the competitive solution, how many DVDs will be produced? What is the profit in the entire industry and for each firm?
(b) If both firms collude and form a joint monopoly, how many DVDs will be produced? What is the profit in the entire industry and for each firm?
(c) If one firm decides to cheat and produce 100 more DVDs, the market price of a DVD drops to $90. Note that, according to Fig. 1, by doing this, the ATC for the cheating firm decreases to $80. Should the firm cheat?
(d) Construct the payoff matrix of strategic pricing for each firm, and identify the optimal strategy of each firm, assuming that both firms cannot detect cheating.

Suppose There Are Two Firms Producing DVD Players