In this question you will work out a model of price competition (Bertrand competition) with differentiatedproducts, i.e., when the two firms that compete produce slightly different products. Consider two price-settingfirms, 1 and 2, each with marginal cost c, that produce goods, 1 and 2, that are imperfect substitutes. Somecustomers are loyal to a particular variety of the good so both firms can still have positive sales when they setdifferent prices. Demand for firm 1's output, q1, as a function of the prices of both products, p1 and p2 , isgiven by q1 = 2 – 3p1 + 3p2. And the demand for firm 2's output, q2, is given by q2 = 6 – 2p2 + P1.a. How can we tell, by looking at the demand functions above, that in the preferences of consumers the twoproducts are substitutes? Explain your answer..b. Write this strategic situation as a simultaneous game between the two firms, specifying the set of players,the set of alternatives and the preferences of each firm. Write down the profit equation of each firm as afunction of the price it sets and that of the other firm.

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oducts, i.e., when the two firms that compete produce slightly different products. Consider two price-setting ns, 1 and 2, each with marginal cost c, that produce goods, 1 and 2, that are imperfect substitutes. Some stomers are loyal to a particular variety of the good so both firms can still have positive sales when they set ferent prices. Demand for firm 1's output, q1, as a function of the prices of both products, p, and p2 , is en by q1 = 2 – 3p1 + 3p2. And the demand for firm 2's output, q2, is given by q2 = 6 – 2p2 + P1. How can we tell, by looking at the demand functions above, that in the preferences of consumers the two products are substitutes? Explain your answer. . Write this strategic situation as a simultaneous game between the two firms, specifying the set of players, the set of alternatives and the preferences of each firm. Write down the profit equation of each firm as a function of the price it sets and that of the other firm.

oducts, i.e., when the two firms that compete produce slightly different products. Consider two price-setting ns, 1 and 2, each with marginal cost c, that produce goods, 1 and 2, that are imperfect substitutes. Some stomers are loyal to a particular variety of the good so both firms can still have positive sales when they set ferent prices. Demand for firm 1's output, q1, as a function of the prices of both products, p, and p2 , is en by q1 = 2 – 3p1 + 3p2. And the demand for firm 2's output, q2, is given by q2 = 6 – 2p2 + P1. How can we tell, by looking at the demand functions above, that in the preferences of consumers the two products are substitutes? Explain your answer. . Write this strategic situation as a simultaneous game between the two firms, specifying the set of players, the set of alternatives and the preferences of each firm. Write down the profit equation of each firm as a function of the price it sets and that of the other firm.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter13: best-practice Tactics: Game Theory

Section: Chapter Questions

Problem 1E

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