Economics Homework Help
Two hydrogen-powered car manufacturers compete using advertisement campaigns. Firms can decide (simultaneously) the level of advertisement, which can be either High or Low. The number of potential cus
Two hydrogen-powered car manufacturers compete using advertisement campaigns. Firms can decide (simultaneously) the level of advertisement, which can be either High or Low. The number of potential customers in a month is 60 and the price of a car is £20,000. If a firm advertises more than its rival, it gets 75% of the customers. If both firms advertise the same level, each firm gets 50% of the customers. The cost of each car is £10,000 and it is only produced if a client demands it. High advertisement costs £100,000 per month and Low advertising has no cost. Firms have a monthly discount factor δ<1. For simplicity, you can express all monetary quantities in thousands (e.g. price of a car is 20, the cost of a car is 10, etc.) a) Suppose that firms play this game every two months but during an infinite horizon of time. What is the minimum δ such that they can sustain a SPE where they use Low advertising?
