Consider a Two- Firm Industry Producing Two Differentiated Products

question 72

Essay

Consider a two- firm industry producing two differentiated products. For simplicity assume that production is costless. Suppose the demand functions for firm 1 and 2's products are given by
q₁ = a - bp₁ + cp₂ q₂ = a - bp₂ + cp₁
where p_i is the price charged by firm i, i = 1, 2 and b > c. Assume that firms are profit maximizers and simultaneously choose prices. Find the equilibrium level of prices,
i)Assuming that the firms cannot collude (they choose prices independently).
ii)Assuming that the firms can collude(they can choose prices jointly).

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Definitions:

Acquisition Differential

The difference between the fair value of an acquired company's identifiable net assets and the actual cost to purchase that company.

Goodwill Impairment

A charge that occurs if the value of goodwill on a company's balance sheet exceeds the tested fair market value.

Gain on Sale

The profit realized from the sale of an asset when the selling price exceeds the asset's book value at the time of sale.

Consolidated Income Statement

A income statement that combines the financial performance of all subsidiaries with the parent company, eliminating intercompany transactions.