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Managerial Economics BM (Term I - 2013) Problem Set on Imperfect Competition

Problems on price competition (Homogeneous products markets and differentiated products markets) 1. Mother Bear and Kony Co. are two firms supplying rewritable discs that are

homogenous in quality, and for both of them the cost of producing each disc is c.25. The daily market demand is given by P = 1 0.00001Q, where prices are in $ per disc and quantities are number of discs. Find the equilibrium prices when the firms compete in prices a la Bertrand. What should be the collusive price? Is it possible to sustain the collusive outcome? How and under what conditions can this be sustained?


In Taco Island, only a French winery and an Australian winery supplies red wine.

The Taco residents have a refined taste for wine and dont perceive the French and Australian wine to be perfect substitutes. However, they perceive the two kinds of wine as close substitutes. The daily demand for French wine in Taco Island is given by QF = 1020 6PF + PA and that for Australian wine is QA = 800 5PA + 2PF. The prices are in Taco dollars (TD) per liter and the quantities are in litres. The cost of producing a litre of red wine is TD90 for the French winery and TD20 for the Australian winery. Find the equilibrium prices. How much of each kind of wine is consumed in Taco Island per day? 3. In the market for energy drinks there are two competing brands Apricot and

Banana, owned by Firm A and Firm B respectively. Consumers perceive them as close substitutes. The annual demand for Apricot is: QA = 168 2PA + PB. PA and PB are prices of Apricot and Banana respectively. The annual demand for Banana is: QB = 168 + PA 2PB. The annual cost function of the firm A is given as CA = 500+ 11QA and that of Firm B is given as CB = 16QB. Prices and cost are given in Rs. per litre and quantities in millions of litres. The firms are profit maximizers. How much are the equilibrium prices of brand Apricot and brand Banana respectively? Find the equilibrium sales (annual) of the two brands. What are the profits of Firm A and B respectively?