Question: In Problem 9, suppose that firm 2 acts as a price leader and can commit in advance to setting its price once and for all.

In Problem 9, 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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a If Firm 2 cuts price to 67 Firm 1s best response is P 1 525 2567 6... View full answer

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