and by qL and qH the outputs of types L and H of firm 2.) Now suppose that the inverse demand function is given by P(Q) = α − Q for Q ≤ α and P(Q) = 0 for
Q > α. For values of cH and cL close enough that there is a Nash equilibrium in which all outputs are positive, find this equilibrium. Check that when π = 0 the equilibrium output of type 0 of firm 1 is equal to the equilibrium output of firm 1
you found in Exercise 285.1, and that the equilibrium outputs of the two types of firm 2 are the same as the ones you found in that exercise. Check also that when π = 1 the equilibrium outputs of type £ of firm 1 and type L of firm 2 are the same
as the equilibrium outputs when there is perfect information and the costs are c
and cL, and that the equilibrium outputs of type h of firm 1 and type H of firm 2 are the same as the equilibrium outputs when there is perfect information and the
Figure 287.1 The information structure for the model in Section 9.5.2, in which firm 2 does not know whether firm 1 knows its cost. The frame labeled i: x encloses the states that generates the signal x for firm i.
costs are c and cH . Show that for 0 1, the equilibrium outputs of types L
and H of firm 2 lie between their values when π = 0 and when π = 1.