You are the manager of a firm that manufactures front and rear windshields for t

Question

You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. DaimlerChrysler has asked your company and your only rival to simultaneously submit a price quote for supplying 100,000 front and rear windshields for its new Jeep Liberty. If both you and your rival submit a low price, each firm supplies 50,000 front and rear windshields and earns zero profit. If one firm submits a low price and the other firm submits a high price, the low-price firm supplies 100,000 front and rear windshields and earns a profit of $9 million and the high-price firm supplies no front and rear windshields and earns a loss of $1 million. If both firms quote a high price, each firm supplies 50,000 front and rear windshields and earns a $7 million profit. Determine your optimal pricing strategy if you and your rival believe the new Jeep is a

Explanation / Answer

Since there is a high barrier to entry for new firms and this is a special edition jeep , it is a good idea to join hand with your only competitor , quote high price and maximize profit at $7m each. If there is a 50% chance that this model will be stopped , the strategy of joining hand with competitor should continue but the pricing should be even higher to maximize profit.

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