Managers of two competing oligopoly firms, Amazon and Nile, must make their pric

Question

Managers of two competing oligopoly firms, Amazon and Nile, must make their pricing decisions simultaneously. Amazon (A) and Nile (N) face the following demand and long-run cost conditions, which are common knowledge to the managers: QA=120-12PA+8PN and LMCA=LACA=$20 QN=100-10PN+12PA and LMCN=LACN=$20 The prices, PAand PN, are the prices charged by Amazon and Nile, respectively. The quantities, QA and QN, are the respective daily quantities sold by each firm. The figure below shows Nile’s best-response curve, BRN. Only one point on Amazon’s best-response curve, point K, is shown in the figure. a.When Amazon believes Nile is going to charge a price of $30, Amazon’s best response is to charge a price of $________. Plot this price pair on the graph, label it J, and then draw the best-response curve for Amazon (label this line ). b.Given the best-response curves for Amazon and Nile, you would predict that Amazon will choose a price of $__________ and Nile will choose a price of $__________. Label this point N in the figure below. c.At the prices associated point N (see part b), Amazon can expect to earn daily profit of $____________ and Nile can expect to earn daily profit of $____________. d.At point C in the figure, Amazon plans to price at $30 and Nile at $40. At pointC, Amazon earns daily profit of $____________, which is ________ (more, less) than it would earn at point N. e.At point C in the figure, Nile earns daily profit of $____________, which is ________ (more, less) than it would earn at point N. f.Point C is not likely to be the decision outcome because it is not _______________ _____________, and either firm could unilaterally ___________ (increase, decrease) its price and earn greater daily profit.

Explanation / Answer

MRa = 120 - 24Pa + 8Pn

MRn = 100 - 20Pn + 12Pa

MCa = MCn = 20

Equating MR and MC, we get

Pa = (100 + 8Pn) / 24

Pn = (80 + 12Pa) / 20

Solving above equation we get

Pa = 6.875

Pn = 8.125

When Pn = 30, then Pa = (100 + 8*30) / 24 = (100 + 240) / 24 = 14.67

Thus, Qa = 120 - 12(6.875) + 8(8.125) = 120 - 82.5 + 65 = 102.5

Qn = 100 - 10(8.125) + 12(6.875) = 101.25

Profit of A = PaQa - 20 Qa = 6.875 * 102.5 - 20 * 102.5 = -1345.3125

Profit of N = PnQn - 20 Qn = 8.125 * 101.25 - 20 * 101.25 = - 1202.34375

Now when Pa = 30 and Pn = 40

Profit of A = (30 - 20) * 102.5 = 1025

Profit of N = (40 - 20) * 101.25 = 2025

a.When Amazon believes Nile is going to charge a price of $30, Amazon’s best response is to charge a price of $__14.67______. Plot this price pair on the graph, label it J, and then draw the best-response curve for Amazon (label this line ). b.Given the best-response curves for Amazon and Nile, you would predict that Amazon will choose a price of $__6.875________ and Nile will choose a price of $___8.125_______. Label this point N in the figure below. c.At the prices associated point N (see part b), Amazon can expect to earn daily profit of $___(-)1345.3125_________ and Nile can expect to earn daily profit of $____(-)1202.34375________. d.At point C in the figure, Amazon plans to price at $30 and Nile at $40. At pointC, Amazon earns daily profit of $___1025_________, which is ___more_____ (more, less) than it would earn at point N. e.At point C in the figure, Nile earns daily profit of $___2025_________, which is __more______ (more, less) than it would earn at point N. f.Point C is not likely to be the decision outcome because it is not ____at their reaction function___________ _____________, and either firm could unilaterally ___increase________ (increase, decrease) its price and earn greater daily profit.

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