Two firms produce differentiated products. Firm 1 faces the demand curve Q1 = 75 -P1 + .5P2. (Note that a lower competing price robs the firm of some, but not all, sales. Thus, price competition is not as extreme as in the Bertrand model.) Firm 2 faces the analogous demand curve Q2 = 75 -P2 +.5P1. For each firm, AC =MC = 30. suppose that firm 2 acts as a price leader and can commit in advance to setting its price once and for all. In turn, firm 1 will react to firm 2’s price, according to the profit-maximizing response found earlier, P1 = 52.5 + .25P2. In committing to a price, firm 2 is contemplating either a price increase to P2 = $73 or a price cut to P2 =$67. Which price constitutes firm 2’s optimal commitment strategy? Justify your answer and explain why it makes sense.
Two firms produce differentiated products. Firm 1 faces the demand
curve Q1 = 75 -P1 + .5P2. (Note that a lower competing price robs the
firm of some, but not all, sales. Thus, price competition is not as extreme
as in the Bertrand model.) Firm 2 faces the analogous demand curve Q2 =
75 -P2 +.5P1. For each firm, AC =MC = 30.
suppose that firm 2 acts as a price leader and can commit
in advance to setting its price once and for all. In turn, firm 1 will react
to firm 2’s price, according to the profit-maximizing response found
earlier, P1 = 52.5 + .25P2. In committing to a price, firm 2 is contemplating
either a price increase to P2 = $73 or a price cut to P2 =$67. Which
price constitutes firm 2’s optimal commitment strategy? Justify your
answer and explain why it makes sense.
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