The annual market demand for UVic coffee mugs is given by P=20-Q, where P is the price, and Q is the quantity (in units of 1000 mugs) of these fancy…

The annual market demand for UVic coffee mugs is given by P=20-Q, where P is the price, and Q is the quantity (in units of 1000 mugs) of these fancy collectors’ items. In this market, consider two sellers, namely the Bookstore with cost function C1(Q1)=2Q1+36 (Q1 is the Bookstore’s quantity); and UVSS with cost function C2(Q2)= 5Q2+4 (Q2 is UVSS’ quantity). Assume both the Bookstore and UVSS maximize profits Questions:

Assume first that the Bookstore and UVSS hold Cournot conjectures when competing for clients

(a) What does it mean if we say that UVSS “holds Cournot conjectures regarding its competitor’s behaviour”?

(b) Derive the so-called best response functions of the Bookstore and UVSS

(c) Derive the Nash equilibrium of this game (i.e. the Cournot-Nash equilibrium).

(d) What would it be worth to the Bookstore to make UVic decide that it should be the only permitted seller of UVic coffee mugs Assume now that Bookstore and UVSS were Bertrand competitors

(e) Sketch the game tree of the Bertrand competition game between Bookstore and UVSS

(f) What would be equilibrium of the Bertrand game between Bookstore and UVSS

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