Home inverse demand, Management Theories

Suppose that two national champions are active in the similar industry but in two neighbouring countries. Initially, neither firm is active in the other country. They every face the following inverse demand curve: P=100-q. Their marginal costs are equal and constant at 10. They both consider entering the market in the other country. If they do so, every of them will face an inverse demand function P=20-0.2q in the foreign country. Though, if there is entry into a firm's home market by a foreign firm, the home inverse demand will no longer be P=100-q, but it will then change to become P=75-0.75q. Note: the demand curves are firm demand curves, not market demand curves.

a)   Measure the firms' optimal quantity if they remain active only in their respective home country. Give the corresponding price and profit.

b)   Measure the firms' optimal export quantity (and corresponding price in the foreign market) if they choose to enter their respective foreign market. Suppose that price discrimination is possible, i.e., that it is possible to sell at a lower price in the export market. What is the additional profit earned in the export market?


Posted Date: 3/19/2013 4:04:40 AM | Location : United States

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