Book Market: suppose that Amazon.com and Barnes and Noble operate under conditio
ID: 2494628 • Letter: B
Question
Book Market: suppose that Amazon.com and Barnes and Noble operate under conditions of constant average and marginal cost, but with the Kindle, Amazon has a marginal cost of production of $1 (the royalties to the author plus a minimal cost of downloading), whereas Barnes and Noble has a constant marginal cost of $12.50. Market demand for books is given by Q =1500 - 20P . Also, suppose that the price charged for any book must be an integer dollar amount.
a. Suppose firms practice Bertrand competition, that is setting prices for their identical products simultaneously. Compute the Nash equilibrium prices. Compute firm output, firm profit, and market output.
b. Is total welfare maximized in the Nash equilibrium? If not, suggest an outcome that would maximize total welfare, and compute the deadweight loss in the Nash equilibrium compared to your outcome.
c. If the Kindle is shut down by a lawsuit and now the only place to get books is Barnes and Noble, what price will Barnes and Noble charge?
Explanation / Answer
a)Since MCi<MCj therefore there is no pure equilibrium
The Bertrand equillibrium implies that p*=MCi and firm 2 captures all market and gets positive profits>0
b)No nash equillibrium exists therefore welfare is not maximized.This can be achieved by introducing capacity constraints such that with perfect competition price C each firm is unable to satisfy all the demand by itself.
c)Barnes and Noble would charge the same price.