Question

In an oligopolistic market, firm i and firm j have constant marginal cost = c for an identical good. They compete to set prices Pi and Pj. The demand for total market demand Q, where if \(P_i > P_j\), the demand for firm i is 0. If \(P_i < P_j\), the demand for firm i is Q. If \(P_₁ = P_j\), then they share the market equally and hence the demand for firm i is \(\frac{Q}{2}\). In equilibrium, the prices of firms i and j are:

• A. \(P_i > P_₁ = c\)
• B. \(P_i > P_j > c\)
• C. \(P_i < P_j < c\)
• D. \(P_i = P_j = c\)

Hint:

Consider what happens if prices are different.

Answer 1

The Correct Option is D

At equilibrium, both firms will set their prices equal to marginal cost. Pricing above marginal cost would eliminate demand, and pricing below would lead to losses.

Thus, the equilibrium price will be equal to the marginal cost for both firms. Hence, the correct answer is (d).