Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The pencil market is controlled by two firms:
AAA Pencil Company and BBB Manufacturing.
The structure of the market makes secret price
cutting impossible. Each firm announces a
price at the beginning of the time period and
sells pencils at the price for the duration of the
period. There is very little brand loyalty among
pencil buyers so that each firm's demand is
highly elastic. Each firm's prices are thus very
sensitive to inter-firm price differentials. The
two firms must choose between a high and
low price strategy for the coming period.
Profits (measured in thousands of Rands) for
the two firms under each price strategy are
given in the payoff matrix below.
AAA - low price
AAA - high price
BBB - low price
60, 60
250, -20
BBB – high price
-20, 250
130, 130
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