Task: Suppose three firms face the same total market demand for their products. The demand is:
|
P
|
|
Q
|
|
$80
|
|
20,000
|
|
70
|
|
25,000
|
|
60
|
|
30,000
|
|
50
|
|
35,000
|
Suppose further that all three firms are selling their product for $60 and each has about one-third of the total market. One of the firms, in an attempt to gain market share at the expense of the others, drops it’s price to $50. The other two quickly follow suit.
1) What impact would this move have on the profits of all three firms? Explain your reasoning.
2) Would those firms have been better off in terms of profit if they all had raised the price to $70? Explain.