Question 1

Orient Bhd. and Theta Bhd. are the only two companies in this industry. Both companies have equal market share with an annual total demand of 1,000,000 units for the industry. The current industry price per unit of goods A is RM100 and the average cost is RM45 per unit. The price elasticity of demand for goods A is 2.0. The companies are contemplating of reducing the price per unit by 20% (low discount) or 50% (high discount). Based on a research, it is estimated if both decrease their price by 20% or 50%, then the increase in quantity demanded will be split 50:50. It is expected that the increase in quantity demanded at industry level if both companies decided to lower the price by 50% is 2,000,000 units. But if one company decides to decrease the price by 20% and the other by 50% then, the company with low discount will capture 30% and the company with high discount will capture 70% of the expected increase in quantity demanded of 1,080,000 units. Required:

a. Calculate the expected demand and derive the increase in demand when both companies decide to decrease selling price by 20%. (4 Marks)

b. Analyze the pricing decisions of the two firms as a non-co-operative game and answer the following;

i. Construct the pay-off matrix, where the elements of each cell of the matrix are the two firm's profit. (10 Marks)

ii. Derive the equilibrium set of strategies. (6 Marks)