Question: A duopoly market structure has been created with the development of a new product called "dysko". Two firms (ABBA Inc. and BGEES Corp.) are currently testing prototypes of dysko using identical technology. Consumer feedback to date confirms that consumers regard ABBA and BGEES products as identical. For each firm, average and marginal costs of production are estimated to be constant at $5 per unit. The market demand curve for dysko is described by: Q = 53-P, where Q = total industry output and P = the market price.

a. You have been told (from a reliable source) that ABBA Inc. will launch its product (choose its output level) in advance of BGEES Corp. Given this information derive the market price plus the output and profit levels for each firm in equilibrium.

b. A Federal minister hints that a change in competition law is likely which will make a joint venture possible for the two firms. This would create a virtual monopoly by allowing the firms to maximize their joint profits. However a top analyst has noted that ABBA will not be interested in a joint venture unless BGEES offers it more than 50% of the profits from a joint venture. Do you agree? Explain.