Pricing by monopolistic competition

Reference no: EM1369674

Game Theory. Assume there are only two automobile companies, Ford and Chevrolet. Ford believes that Chevrolet will match any value it sets, but Chevrolet too is interested in maximizing profit. Use the following price and profit data to answer the following questions.

Fords Chevrolet's Ford's Chevrolet's Selling Selling Profits Profits
Price Price (millions)(millions)
$4,000 $ 4,000 $8 $8
$4,000 $8,000 $12 $6
$4,000 $12,000 $14 $2
$8,000 $4,000 $6 $12
$8,000 $8,000 $10 $10
$8,000 $12,000 $12 $6
$12,000 $4,000 $2 $14
$12,000 $8,000 $6 $12
$12,000 $12,000 $7 $7

a. What price will Ford charge?
b. What price will Chevrolet charge once Ford has set its price?
c. What is Ford's profit after Chevrolet's response?
d. If the two firms collaborated to maximize joint profits, what prices would they set?
e. Given your answer to part (d), how could undetected cheating on price cause the cheating firm's profit to rise?

Reference no: EM1369674

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