What are the market prices and market power

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Two software companies, Firm 1 and Firm 2 sell competing products. Let pi and xi be the price and quantity sold by Firm i, i = 1, 2. The demand functions for Firm 1 and Firm 2are given by x1 = 1000(90 – 1/2 p1 + 1/4 p2) and x2 = 1000(90 -1/2 p2 + 1/4 p1), respectively. For each firm, 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 revenues. Suppose that the firms operate under Bertrand competition. a. What are the market prices? b. Are the firms enjoying market power? Explain. Suppose now that Firm1 sets its price first. After observing Firm 1’s price, Firm 2 decides its own price. c. What are the market prices?

Reference no: EM131091223

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