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Two large diversified consumer product firms are about to enter the market for a newpain reliever. The two firms are similar in strategic approach.

The firms have similar demand curves so that each firm expects to sell one-half of the total market output at any given price.

The market demand for pain reliever is given as

P = 6.5 - 0.0025Q

The costs differ between firms such that firm 1 has costs of C = 3 + 2Q1 and firm 2 has costs of C = 5 + Q2.

Prices and quantities are per bottle.

(a) If the firms act as Cournot duopolists, solve for the firm market outputs and equilibrium prices.

(b) How much should Firm 1 be willing to pay to purchase Firm 2 if collusion is illegal but a takeover is not?

Hint: Firm 1 would have a monopoly position in the market.

Business Management, Management Studies

  • Category:- Business Management
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