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Two firms with differentiated products are competing in price. Firm A and B face the following demand curves: Qa = 140 -2Pa +Pb and Qb= 70 - 2Pb + Pa respectively. Both firms have zero marginal costs, but face a fixed cost of 20.
a) Give equations for and graph each firm's reaction curve.
b) If both firms set their prices at the same time, what is the Nash equilibrium price and quantity for each firm? What is the profit?
c) Suppose A sets its price first and then B responds. What price and quantity does each firm set now?
d) Compare the profits from part b and c. Which firm benefits more from the sequential price choosing?
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