PC Connection and CDW are two online retailers that compete in an internet marke

Question

PC Connection and CDW are two online retailers that compete in an internet market for digital cameras. While the products they sell are similar , the firms attempt to differentiate themselves through their service policies. Over the last couple of months, PC Connection has matched CDW's price cuts, but has not mathced its price increases. Suppose that when PC Connection matches CDW's price changes , the inverse demand curve for CDW''s cameras is given by P= 1,000 - #Q. When it does not match price changes , CDW's inverse demand curve is P=850-0.5Q. Based on this information , determine CDW's inverse demand function over the last couple of months.

P =          -          Q if Q<60

                -          Q if Q>60

Over what range will changes in marginal cost have no effect on CDW's profit-maximizing level of output?

$   to $

Explanation / Answer

Acoording to the problem,

when PC Connection matches CDW's price changes , the inverse demand curve for CDW''s cameras is given by

P= 1000 - #Q

Therefore, the marginal curve is given by

P=1000 - 2#Q

When it does not match price changes , CDW's inverse demand curve is

P= 850 - 0.5Q

Therefore, the marginal curve is given by

P= 850 - Q

The problem is a typical case of the Sweezy's Kindked Demand Curve Model.

Following are the assumption of a kinked demand curve:

i. Assumes that if one oligopolistic organization reduces the prices, then other organizations would also cut their prices

ii. Assumes that if one oligopolistic organization increases the prices, then other organizations would not follow increase in prices

iii. Assumes that there is always a prevailing price

Now, we got -

P = 1000 - 2#Q &

P = 850 - Q

=> 1000 - 2#Q = 850 - Q

=> Q = 150/(2# - 1)

As per the problem, For the value of Q to be 60, # = 7/4 = 1.75

The inverse demand curve in the problem is given by,

P = 1000 - #Q if Q>=60

P = 850 - 0.5Q if Q <=60

The Marginal revenue curve is given by,

P = 1000 - 2#Q if Q>60

P = [790, 1000 - 120#] if Q = 60

P = 850 - Q if Q<60

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