Consider bertrand competition but with differentiated, Business Economics

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Consider bertrand competition but with differentiated

Consider Bertrand competition but with differentiated products. The products are Mishka’s coffee and Temple coffee. The demand for Mishka’s coffee is given by qM = 12 − 2pM + pT where pM is the own price of coffee and pT is Temple’s price of coffee. Demand for Temple’s coffee is qT = 12 − 2pT + pM. Note that because the products are differentiated, if one coffee shop sets a lower price it does not capture the entire coffee market. Assume the marginal cost of each coffee shop is 3.

(a) Find the best response functions of each coffee shop.

(b) Solve for the equilibrium prices of each coffee shop.

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