Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 12

PC Connection and CDW are two online retailers that compete in an Internet market for digital cameras. While the products they sell are similar, the firms attempt to differentiate themselves through their service policies. Over the last couple of months, PC Connection has matched CDW's price cuts, but has not matched its price increases. Suppose that when PC Connection matches CDW's price changes, the inverse demand curve for CDW's cameras is given by P = 1,500 - 3 Q. When it does not match price changes, CDW's inverse demand curve is P = 900 - 0.50 Q. Based on this information, determine CDW's inverse demand and marginal revenue functions over the last couple of months. Over what range will changes in marginal cost have no effect on CDW's profit-maximizing level of output?