Consider a market with only two firms. Demand on this market is given by D(p) = 20 – 3p. Initially both firms have the same constant per-unit cost c1 = c2 = 2.
a) What is the equilibrium in this market if firms behave as Bertrand competitors? How much do the firms produce and what are their profits?
b) Now suppose that firm 2 develops a new production technique that lower its per-unit cost to c2 = 1 (the other firm still has c1 = 2 ). What are the equilibrium prices and quantities after this innovation if the firms behave as Bertrand competitors? What are their profits? Do consumers benefit from the efficiency-enhancing innovation of firm 2?