Regulation and Antitrust Policy (Econ 180) Drake University, Spring 2007 William M. Boal

Oligopoly and Collusion

### Version A

I. Multiple choice [3 pt each: 30 pts total]

(1)b. (2)e. (3)d. (4)d. (5)a. (6)d. (7)c. (8)d. (9)b. (10)c.

II. Problems

(1) [Game theory: 15 pts]

1. Firm B plays "low price";
2. Firm A plays "low price";
3. Yes, there is a Nash equilibrium.
Both firms play "low price."
This is the only Nash equilibrium.

(2) [Collusion: 30 pts]

1. \$7;
2. 5 million;
3. \$10 million;
4. \$3;
5. 9 million;
6. \$0 million.

(3) [Cournot duopoly: 25 pts]

1. P = (12 - 0.01 qA) - 0.01 qB;
2. MRB= (12 - 0.01 qA) - 0.02 qB;
3. qB = 450 - 0.5 qA;
4. qA = qB = 300;
5. P = \$6.

### Version B

I. Multiple choice [3 pt each: 30 pts total]

(1)c. (2)b. (3)c. (4)b. (5)b. (6)b. (7)b. (8)a. (9)a. (10)a.

II. Problems

(1) [Game theory: 15 pts]

1. Chain B plays "downtown";
2. Chain A plays "uptown";
3. Yes, there is a Nash equilibrium.
Chain A plays "uptown," Chain B plays "downtown."
There is another Nash equilibrium: Chain A plays "downtown," Chain B plays "uptown."

(2) [Collusion: 30 pts]

1. \$8;
2. 4 million;
3. \$4 million;
4. \$6;
5. 6 million;
6. \$0 million.

(3) [Cournot duopoly: 25 pts]

1. P = (9 - 0.05 qA) - 0.05 qB;
2. MRB= (9 - 0.05 qA) - 0.10 qB;
3. qB = 60 - 0.5 qA;
4. qA = qB = 40;
5. P = \$5.