Suppose we have two mobile phone companies operating in a duopoly market structure. These firms face a market demand of p=1000 – 5Q = 1000 – 541 – 542, where p is the market price, 91 and 92 are the outputs of firms 1 and 2 respectively and Q = 91 +92. Each firm has a constant marginal cost of $25 per unit and they compete by choosing quantity, that is Cournot competition. (a) Solve for firm 1's best response function. (3) (b) Using your result from part (a) state firm 2's best response function. (1) (c) Solve for the Nash-Cournot equilibrium, stating each firm's output and the market price. (3) (d) How would a Stackleberg equilibrium with a dominant firm 1 moving first be different to the Nash-Cournot equilibrium? Explain.
