Consider the following demand equations for two differentiated products produced by independent firms.
q1(p1, p2, A) = 0.6A - 2p1 + p2
q2(p1, p2, A) = -0.4A + p1 - 3p2
For simplicity assume that costs are zero for both firms. Price reaction functions for the two firms can be derived as
p1 = (10 + .6A)/4 + (1/4)p2
p2 = (10 - .4A)/6 + (1/6)p1
a) Is advertising predatory or cooperative in this example?
b) Suppose that A = 10. Solve for p1 and p2.
c) Now suppose that firm 1 increases A to 20. Solve for p1 and p2. Briefly discuss.