There are two firms in an industry,Firm A and Firm B.Both firms sell a homogenous product.If one firm sets a price higher than the other firm,then all the demand goes to the firm setting the lower price.If prices are equal,the demand is shared equally between the two firms.The following figure depicts the demand faced by Firm A.What is Firm B's strategy that could explain such a demand curve faced by Firm A?

Question

Quizplus · Accepted Answer

Firm B's strategy could be to set its price lower than Firm A's price whenever Firm A sets its price higher than p (which is the price at which Firm B would set its price to p'). However, whenever Firm A sets its price below p, Firm B would match Firm A's price to share the demand equally between the two firms. This explains the horizontal portion of the demand curve between p and p'. Therefore, the best choice is D.

There Are Two Firms in an Industry,Firm a and Firm