Consider three markets: M1, M2, and M3. There are features of these markets that the Department of Justice observes and features the Department of Justice does not observe. The DOJ observes that M1, M2, and M3 have one, two, and three firms respectively, that output in all three markets is non-differentiated, and aggregate demand in each market is given by P = 100-Q. The DOJ does not observe firms costs and therefore assumes that marginal costs are constant and equal to c1, c2, and c3 in the three markets.

a. If firms in M2 or M3 are colluding, what price will we observe?

b. Assume that c2 = c3. If we observe identical prices in M2 and M3, what have we learned about the nature of competition in markets 2 and 3 (i.e., Cournot v. Bertrand v. Collusion)?

c. Assume now that the DOJ has some information about costs. They still do not know the values of marginal costs, but they do know that a $1 increase in oil prices causes a $1 increase in c. How can variation in oil prices and observed prices be used to distinguish between collusion, Bertrand competition, and cournot competition?