Answer to Question #225572 in Microeconomics for Lsg

Question

The pencil market is controlled by two firms: AAA Pencil Company and BBB Manufacturing. The structure of the market makes secret price cutting impossible. Each firm announces a price at the beginning of the time period and sells pencils at the price for the duration of the period. There is very little brand loyalty among pencil buyers so that each firm's demand is highly elastic. Each firm's prices are thus very sensitive to inter-firm price differentials. The two firms must choose between a high and low price strategy for the coming period. Profits (measured in thousands of Rands) for the two firms under each price strategy are given in the payoff matrix below.

 AAA - low price

AAA - high price

BBB - low price

60, 60

250, -20

BBB – high price

-20, 250

130, 130

Answer 1

For AAA

it can make profit when price is always low, that is 60 and 250 so the best thing is to charge low prices so as to get revenue.

For BBB, it can make profit when prices are low and also when prices are high. the best option here is to practice price discrimination.