Firm 1 sells hot dogs, while firm 2 sells hot dog buns. They decide independently of...

 

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Firm 1 sells hot dogs, while firm 2 sells hot dog buns. They decide independently of each other how to price their products (p per hot dog, and p2 per bun). Consumers only want to buy the two products jointly (an example of 'perfect complements'), and pay attention only to the total price of an hotdog/bun combination. To fix ideas, say that the demand for either product is 1500 - P. Hence payoff functions (profits) are: 30 Ju(P, P2) = (1500 - P+) (p c) P1+P2 30 \u (P1, P2) = (1500 - PP) (p2 c). P1+P2 30 (a) Compute the two firms' best responses, and represent them on a same graph. (b) Compute the Nash equilibrium. (c) Suppose the two firms collude, and agree to charge a same price p. For which p is their profit maximized? How come this p is different from the equilibrium price identified in (b), and profits are larger? Firm 1 sells hot dogs, while firm 2 sells hot dog buns. They decide independently of each other how to price their products (p per hot dog, and p2 per bun). Consumers only want to buy the two products jointly (an example of 'perfect complements'), and pay attention only to the total price of an hotdog/bun combination. To fix ideas, say that the demand for either product is 1500 - P. Hence payoff functions (profits) are: 30 Ju(P, P2) = (1500 - P+) (p c) P1+P2 30 \u (P1, P2) = (1500 - PP) (p2 c). P1+P2 30 (a) Compute the two firms' best responses, and represent them on a same graph. (b) Compute the Nash equilibrium. (c) Suppose the two firms collude, and agree to charge a same price p. For which p is their profit maximized? How come this p is different from the equilibrium price identified in (b), and profits are larger?

Answer rating: 100% (QA)

a To compute the best responses of the two firms we need to maximize their respective profit functions Lets start with Firm 1 Firm 1s profit function ... View the full answer