A monopolistically competitive firm finds that the elasticity of demand facing its brand is -1.5, while its rival faces an elasticity of -2 for its brand. Both firms have a marginal cost of $5 per unit.
Using the pricing rule of thumb, determine the profit-maximizing prices both firms will charge. In addition, find out the price-cost margin for each firm and indicate which has more pricing power and why.
Note Rule of thumb pricing is P* = (Marginal Cost)/(1+(1/Ed))
where Ed is the elasticity of demand. Thus pricing here is expressed as a markup over marginal cost.