Suppose the demand for Pepsi-Cola is qp = 54 - 2pp + 1pc. The demand for Coca-Cola is qc = 54 - 2pc + 1pp. Each firm faces a constant marginal cost of zero. Determine the Bertrand equilibrium prices. What happens to the Bertrand equilibrium prices and profits if increased differentiation causes the demand for Pepsi-Cola to become qp = 104 - 2pp + 1pc while the demand for Coca-Cola remains
unchanged?
What will be an ideal response?
For Pepsi-Cola, profit maximization means δπ/δpp = 54 - 4pp + pc = 0. For Coca-Cola, profit maximization means δπ/δpc = 54 - 4pc + pp = 0. Both firms are at equilibrium setting a price of 18. If Pepsi-Cola's demand curve shifts, profit maximization for them implies δπ/δpp = 104 - 4pp + pc = 0. Both firms are now at equilibrium when Pepsi-Cola charges 31.33 and Coca-Cola charges 21.33.
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What will be an ideal response?
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