Question

Two firms compete in a Cournot fashion. Firm 1 successfully engages in an activity that raises its rival's marginal cost of production.

a. Provide two examples of activities that might raise rivals' marginal costs.

b. In order for such strategies to be beneficial, is it necessary for the manager of firm 1 to enjoy hurting the rival? Explain.

Short answer

For these strategies to be beneficial, Firm 1 does not need to hurt its rival when making decisions to increase marginal costs. This can be justified by the fact that firm 1 is not damaging or affecting the reputation of firm 2 through unfair practices

Step-by-step solution

Introduction

One of the strategies that the managers of some companies that have some market control to increase or maintain their profitability is to increase the costs of rival companies. It causes the incentives to enter or keeping the same level of production to be distorted.

To define Cournot competition model

The Cournot competition model is an imperfect competition model in which two companies with identical cost functions compete with homogeneous goods in a static environment. One of the strategies that Firm 1 can adopt is to increase the rival's distribution costs, which will reduce its profits. For example, if a Software company decides to restrict the distribution of rival software to computer companies like Lenovo, Acer and Asus, This will increase the rival's marginal costs.

A second strategy that the firm can adopt is to increase the input price. By modifying its production, Firm 1 can influence the market price and cause firm 2's variable costs to increase and, therefore, to increase marginal costs.

To find the necessary things for the manager of firm

For these strategies to be beneficial, Firm 1 does not need to hurt its rival when making decisions to increase marginal costs. This can be justified by the fact that firm 1 is not damaging or affecting the reputation of firm 2 through unfair practices. What it seeks is to modify price levels so that marginal costs increase and production is reduced, while firm 1 will take advantage of this scenario to increase production and take advantage of the rise in prices to obtain greater benefits.