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suppose that firm 2 acts as a price leader and can commit in advance to setting its price once and for all. In turn, firm 1 will react to firm 2's price, according to the profit-maximizing response found earlier, P1=52.5+.25P2. In committing to a price, firm 2 is contemplating either a price increase to P2=$73 or a price cut to P2=$67. Which price constitutes firm 2's optimal commitment strategy? Justify your answer and explain why it makes sense.

Reference to use:


Two firms produce differentiated products. Firm 1 faces the demand curve Q1 = 75 - P1 + 0.5P2. Firm 2 faces an analogous demand curve Q2 = 75 - P2 + 0.5P1. For each firm, AC=MC=30.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9746712

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