Two firms in a duopolistic industry have constant and equal marginal costs c and face market demand schedule given by p k - q where k > c and q is total output.
1. What would be the solution to the Bertrand price setting game?
2. Compute the joint-profit maximising solution for this industry.
3. Consider an infinitely repeated game based on the Bertrand stage game when both firms have the discount factor o 1. What trigger strategy, based on punishment levels p c, will generate the outcome in part 2? For what values of o do these trigger strategies constitute a subgame perfect Nash equilibrium?