Oligopoly

Now assume that the meat-Now assume that the meat-processing industry is a duopoly, with two firms: Marion's Meat-grinders and Kostas' Kutters. Their production functions are as described before:

q^M = L^0.6K^0.4;

q^K= L^0.5K^0.5 ;

the wage rate is $5 and the rental rate of capital is $10. The market demand for processed meat is: Q=225 ± 9p

2.1 Collusion

Imagine that the two firms 'collude', they form a cartel.

(a) What will be the market price, the market output, the output of each firm and the carrtel's total profits?Explain.

2.2 Cournot equilibrium

Now the two firms do not collude, they compete on quantities à la Cournot.

(b) What are the two firms' best response functions? Show you calculations.

(c) What will be the market price, the market output, the output of each firm and the firms' profits?

2.3 Comparison: Perfect Competition vs. Collusion vs. Cournot

(d) Calculate the Consumer Surplus, the Producer Surplus, and total Welfare for the collusive (cartel) and the Cournot equilibrium. Compare with the situation of perfect competition. Comment.

2.4 Bertrand Competition with identical products

Assume initially that the two firms compete on prices à la Bertrand. Also suppose that the production functions and factor prices are as before: q^M = L^0.6K^0.4 ;

q^K= L^0.5K^0.5 ;the wage rate is $5 and the rental rate of capital is $10.

(e) Is there a Bertrand equilibrium price? What would this be? Would both firms stay in the market? Explain briefly.

2.4 Bertrand Competition with differentiated products Now the two firms compete on prices à la Bertrand, and they also have the same
(constant) marginal (and average) costs MCK= MCM = ACK= ACM =10.

The two firms initially sell identical products, and the market demand for processed meat is: Q=225 ± 9p

(f) What is the Bertrand equilibrium price and the market equilibrium quantity?
(g) What are the two firms' output and profit? Assume for simplicity that if if KK's and MM's prices are equal, consumers 'flip a coin' to decide which to buy.

Now MM successfully lobbies in parliament to obtain the "True Hungarian" product label, thereby differentiating its products from KICs. As a result the demand functions facing the two firms now are:

Q^M=145 ± 6p^M + 9p^K and Q^K=100 ± 9p^K+ 6p^M

(i) Was it worth it for MM to obtain the "True Hungarian" product label (compare with the undifferentiated products case)? How much is the maximum amount that MM is willing 'contribute' to the ruling party's re-election campaign (in order to ensure that they can keep the label)?

(j) Are KK hurt by MM obtaining the "True Hungarian" label? Why or why not?