PROBLEM Ne1 Consider a repeated Bertrand setting in which tw

PROBLEM Ne1 Consider a repeated Bertrand setting in which two firms are trying to collude The collusive agreement prescribes the firms to charge the n not to be split in half. Rather, firm number one will receive a share si > 1/2 ? (0, 1) and firm number 2 will receive a share 82 1-81. Deviation is punished by a never-ending price war Which firm will have stronger incentives to deviate from the collusive agreement? Hint: it\'s a y price, but the profits are

Solution

As we know that in “Bertrand model” in the NE, both the firm will charge their marginal cost. Because they want to capture the entire share of the market in order to maximize profit. So, here the game will end up where both will charge the marginal cost.

Now, here if they collude and change the monopoly price then the total profit will be maximum. Now, as the profit will be split into two individual, the individual profit will be less than the profit if a firm will be able to capture the entire market, => both the firm will have an intensive to deviate from the collude. So, here both the firm have the incentive to deviate from the collusion.

Now, here one firm will receive a share of “s1 > ½” and the other will receive a share of “s2 = 1 – s1, => s2 < ½”, => here the 2^nd firm will get less portion of the profit. So, the 2^nd firm has more incentive to deviate from the collusion to capture the entire market.