If two firms exist in the market, it is often expected that the Cournot (Nash) equilibrium will occur. If the firms have significant excess capacity, then it is likely that corporate strategy will emphasize:
A) competition and high prices.
B) competition and low prices.
C) cooperation and low prices.
D) cooperation and high prices.

Question

Quizplus · Accepted Answer

If the two firms have significant excess capacity, they would likely engage in a price competition to sell off their excess output. This would lead to a lower price equilibrium in the market. Therefore, the best choice is competition and low prices, which is Option B.

If Two Firms Exist in the Market, It Is Often