Two firms engage in Bertrand competition in differentiated products. After doing all the appropriate calculations,you find the best-response functions are PB = 2.5 + .15PC and PC = 1.5 + .075PB. Without doing any further calculations,can you determine the relationship between their Nash equilibrium prices?
A)Yes,PB PC
B)Yes,PC PB
C)Yes,PB = PC
D)No; it cannot be determined.

Question

Two firms engage in Bertrand competition in differentiated products. After doing all the appropriate calculations,you find the best-response functions are PB = 2.5 + .15PC and PC = 1.5 + .075PB. Without doing any further calculations,can you determine the relationship between their Nash equilibrium prices?
A)Yes,PB > PC
B)Yes,PC > PB
C)Yes,PB = PC
D)No; it cannot be determined.

Quizplus · Accepted Answer

Given the best-response functions, PB increases with PC and vice versa, but the base price of PB (2.5) is higher than that of PC (1.5), and the rate of increase of PB with respect to PC is also higher. This implies PB will always be greater than PC at equilibrium.

Two Firms Engage in Bertrand Competition in Differentiated Products