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Industrial Organization- BCOR 310

SPRING 2015
Professor: 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= P

As collusion
price in one period the two forms cannot stabilize the standers or
1
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 production
3. 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.
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If both firms charge the same price, what is Firm 1s preferred price?

ii.

If both firms charge the same price, what is Firm 1s 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?