Consider a Two- Firm Industry Producing Two Differentiated Products

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).