Product Differentiation, model and analysis

Product Differentiation:

1) Model:

* Small Car Market (Oligopoly)

Two Firms: Ford (Firm 1) and Toyota (Firm 2) with Focus and Echo, respectively.

* For simplicity, assume that MCF = ACF = c = ACT = MCT.

Demand facing Ford is assumed to be QF = a − PF +β . PT ............(i).

* If β > 0, the increase in PT will increase QF. It means Focus as well as Echo are substitutes.

* If β < 0, two products are complements.

2) Analysis:

Let’s get best response of Ford to PT.

πF = (PF − c)QF = (PF − c)(a − PF + β . PT) ..........(ii)

F/dPF = + − 2 PF + β.PT = 0 ........(iii)

The reasonable price PF is PF = (a + c + β.PT)/ 2  (iv) (Ford’s reaction curve to Toyota’s price) For example, if Toyota sells Echo at PT = c , then Ford’s best way to maximize its profit is to sell Focus at PF = (a + c + βc)/ 2

Suppose the demand facing Toyota is QT = a − PT + β . PF  ..........(v)

In the same way, we can get PT = (a + c + β.PF)/2 ...........(vi)

11_product differentiation.jpg

Point a and c: (a +c)/2
Point b and d: (a +c)/2-β

If 0 < β < 2, then Focus and Echo have substitutability in some degree.

579_focus and echo.jpg

If β < 0 , we get the same results. But reaction curves are downward sloping.
If β > 2 , PF *, PT * < 0 . In practice, PF * = PT * = c

As β goes up, the substitutability will go up, which means there are almost identical products.

Therefore it is same in the perfect competition pricing.

Latest technology based Microeconomics Online Tutoring Assistance

Tutors, at the, take pledge to provide full satisfaction and assurance in Microeconomics help via online tutoring. Students are getting 100% satisfaction by online tutors across the globe. Here you can get homework help for Microeconomics, project ideas and tutorials. We provide email based Microeconomics help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Microeconomics. Through Online Tutoring, you would be able to complete your homework or assignments at your home. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for Microeconomics Homework help and assignment help services. They use their experience, as they have solved thousands of the Microeconomics assignments, which may help you to solve your complex issues of Microeconomics. TutorsGlobe assure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide the homework help as per the deadline or given instruction by the student, we refund the money of the student without any delay.

2015 ©TutorsGlobe All rights reserved. TutorsGlobe Rated 4.8/5 based on 34139 reviews.