Question

Suppose that Pepsi and Coke are competing in a horizontally differentiated Bertrand market and setting prices. The demand curves are as follows:

QC = 60 ? 2PC + 1PP

QP = 90 ? 5PP + 4PC

Coke face marginal cost MCC = 4 and Pepsi faces marginal cost MCP = 8.

(a) Write the equation for the demand for coke in terms of price PC as a function of PP and QC .

(b) Determine the marginal revenue for Coke as a function of PP and QC .

(c) Find the equation that tells how much Coke would produce for any price PP using the above.

(d) Find the reaction function for Coke and for Pepsi (PC as a function of PP ) using your answer above.

(e) Determine the Bertrand equilibrium

Answer 1