Question

Consider a market with two horizontally differentiated firms, X and Y. Each has a constant marginal
cost of $20. Demand functions are:
?? = 80 – 2?? + ??
?? = 80 – 2?? + ??
a) (10 points) Calculate the Bertrand equilibrium in prices in the market. (You must show steps. Just
writing the answer is NOT acceptable)
b) (5 points) Now suppose firm X undertakes a process innovation that reduces its marginal cost of
production from $20 to $15. The fixed cost of undertaking this process innovation is F > 0. Is this a
tough commitment or a soft commitment? Why? For what values of F would it make sense for firm X
to make this commitment?

Answer 1