Economics 2261A/B Lecture Notes - Lecture 5: Demand Curve, Marginal Revenue, Best Response
10 Feb 2015
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The profit-maximizing price for one firm given the price of the other firm is positively related to the price of the other firm"s product. This occurs because as one firm lowers its price (say coke), demand will move toward coke and away from pepsi. In order for pepsi to maintain demand and profits, pepsi must also lower its price. By the same reasoning, if coke raises its price, demand will begin to move toward pepsi, allowing pepsi the opportunity to raise its price and profits without hurting demand. b) Pepsi"s demand is less sensitive to changes in coke"s price and more sensitive to changes in its own price. This implies that as coke"s price increases, relatively little demand will move to. Pepsi, but as pepsi raises its price, relatively more demand will move to coke. This implies brand loyalty for pepsi is low when compared with coke meaning that pepsi has less room to move its price.
