One strategy thatrms often strive for is what is called "product differentiation". where a rm. eitherthrough advertising or other means. convinces consumers that it's product is different than what otherrms are offering. One question is whether or not differentiating one's producttranslated into increased protability. which would explain such behayior byrms. To Investigate this question. note that iftwo rms in the same industry have differentiated products. then each Will demand a possibly different price in the market. Hence. let us describe Firm 1 and Firm 2's demand curves as P1=100701702 P2=100701702 respectively, where the term {3 represents how much the otherrm's production affects the demand for my product Notice that when = D , the demand for each rm does not depend on the output ofthe otherrm at all, so that each firm is in essence a monopoly. On the other hand. if is very large. then the demand for each firm can increase or decrease by large amounts depending on what the otherrm does. Therefore. we may interpret this as follows: The more a firm can differentiate it's produL't. the smallerthe B term. and the more it has monopoly power. Let us investigate whether differentiating our product is a protable venture. To that end, given the demand curves above, it follows that for each rm that we have MR1=10072Q171302 MR2 =100701c202 Also. ifwe assume that TC(Q1) = 021 T0032) :02. itfollows that Mam) = 201 MOE?) = 202 Solve for each rm's best response function given the information above. \fWe can not conclude anything With the information given. 0 One rm was able to increase prots. but the otherwasn't. Therefore differentiating one's product may or may not be benecial. 0 We can conclude that when rms are able to differentiate their products. they are able to make more prots. 0 Both rms exhibited lower prots after differentiating their products. Therefore, it is betterto make your product as similarto your competitor's as possible. \f