Pricing decision based on competitor's response In the market for one of its products, MD and its two major competitors (CN and KL) together account for 95% of total sales. The quality of MD's products is viewed by customers as being somewhat better than that of its competitors and therefore at similar prices it has an advantage. During the past year, however, when MD raised its price to 1.2 per litre, competitors kept their prices at 1.0 per litre and MD's sales declined even though the total market grew in volume. MD is now considering whether to retain or reduce its price for the coming year. Its expecta- tions about its likely volume at various prices charged by itself and its competitors are as follows:

Experience has shown that CN tends to react to MD's price level and KL tends to react to CN's price level. MD therefore assesses the following probabilities:

Prices per litre MD CN KL MD's expected sales () () () million litres 22 1.2 1.2 22 1.2 1.2 2.7 1.2 1.1 2.3