Question: ERG and ENI are two large Italian companies operating in the market of oil extraction. ERG (firm 1) and ENI (firm 2) must decide how much oil to extract. Once the CEO of each firm has decided, she cannot revise her decision (i.e. 'the game' is played once). Assume also that the good (oil extracted) is homogeneous across the two firms. The market demand is \(\left(\right.\) note: \(\left.Q=q_{1}+q_{2}\right)\)

The cost function for each firm is:

First, assume the two firms are competing á la Cournot.

1. Compute analytically each firm's reaction function and draw them in a graph.
2. Compute analytically each firm's profit maximizing quantity, the equilibrium price, and each firm's profit.

Suppose now that the two firms are competing à la Stackelberg: indeed, ERG was founded in1938, while ENI in 1953 . Therefore, one of the two firms, ERG (firm 1), has a time advantage, i.e. it decided how much oil to extract before the opponent, ENI (firm 2).

1. What would be ERG's marginal revenue \(\left(M R_{1}\right)\) in this scenario?
2. How much oil does ERG decide to extract to maximize its profits? What about ENI?
3. What is the equilibrium price now?
4. What are each firm’s profits?
5. Comment on your results. [Hint: compare results under Cournot competition and Stackelberg competition and give an economic explanation for this difference]

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