Reference no: EM131392194
Two software companies sell competing products. These products are substitutes, so that the number of units that either company sells is a decreasing function of its own price and an increasing function of the other product's price. Let P1 be the price and X1 the quantity sold of product 1 and let P2 and X2 be the price and quantity sold of product 2. Then X1 = 1,000(90- .5P1 + .25P2) and X2 = 1,000(90 - .5P2 + .25P1). Each company has incurred a fixed cosr for designing their software and writing the programs, but the cost of selling to an extra user is zero. Therefore each company will maximize its profits by choosing the price that maximizes its total revenue.
a) Write an expression for the toal revenue of company 1, as a function of the its price P1 and the other company's price P2. _____________________________
b) Assume that both companies movesimultaneously to set the price. That is, neither company can observe the other company's price before setting its own. Company 1's best response function BR1(.) is defined so that BR1(P2)is the price for product 1 that maximizes company 1's revenue given that the price of product 2 is P2. With the revenue functions we have specified, the best response function of company 1 is described by the formula _________________
c) Use a similar method to solve for company 2's best response function ___________________
d) Solve for the Nash equilibrium prices ___________________
e) Unlike in the previous questions, suppose that company 1 sets its price first. Company 2 knows the price P1 that company 1 has chosen and it knows that company 1 will not change this price. If company 2 sets its price so as to maximize its revenue given that company 1's price is P1, then what price will company 2 choose? _________________
If company 1 is aware of how company 2 will react to its own choice of price, what price will company 1 choose? ____________________
Given this price for company 1, what price will company 2 choose? ____________________
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