Reference no: EM132421858

Part a)

There are four firms competing in the market for sliced wholemeal bread. The product is homogenous. The marginal cost of each loaf of bread is 20. Weekly market demand is given by P = 360 - Q, where P is price and Q is quantity (for all firms).

(i) Once prices are set in this market, they cannot be changed. Customers will choose the lowest price product. What price will the four firms charge and why?

(ii) Now assume that firms make pricing decisions on a weekly basis and have a weekly discount rate of 0.3%. The current market price is 80 but firm 1 wants to increase its price to the monopoly price. Will firms 2, 3 and 4 follow suit? What price will each of the four firms charge and what profits will they make?

(iii) Now assume that there are 40 firms. How will this affect your answer to (ii)?

(iv) If the four firms sell to different supermarkets and do not publicly disclose their prices, how will this affect the sustainability of cooperative pricing between the four bread manufacturers? Why?

Part b)

b) In a dynamic pricing game, what is the effect of product differentiation on the sustainability of price cooperation?

c) Firm A has just released an innovative new product. What barriers to imitation will give Firm A an early mover advantage over a potential new entrant, Firm B? How will these give Firm A an advantage?

c.i) If the new product released by Firm A is an experience good, which of the early mover advantages will give Firm A the biggest advantage over Firm B? Why?

c.ii) Having established an early mover advantage over Firm B, what pricing strategy could Firm A use in order to deter Firm B from entering the market?