Assume that Unilever and Proctor and Gamble are the only two firms in the baby detergent...
Assume that Unilever and Proctor and Gamble are the only two firms in the baby detergent market. Their unit cost of production is $5 and their inverse demand market demand is given by P=10-2Q, where Q is the total production by the duopoly.
a. Solve for the Bertrand equilibrium price and market output.
b. As manager of Proctor and Gamble, you decided to invest heavily in advertising. Would your market demand go away if you start charging a price higher than $5 per unit? Explain.
Homework Answers
A) since Bertrand-Nash eqm with constant MC & a homogeneous good.
So at equilibrium P1 & P2 = MC = 5 .
From dd curve 5= 10- 2*Q ,
Q = 2.5 units. Answer
B) yes , if the other firm doesn't involve in advertising expenditure & hence still charges P = 5,
Then consumers will buy from the lower cost firm always.
Thus market demand will go away if any price above 5 is charged.
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