Problem: Suppose that Ericsson and Nokia are the two primary competitors in the market for 4G handsets. Each firm must decide between two possible price levels: $100 and $90. Production cost is $40 per handset. Firm demand is as follows: if both firms price at 100, then Nokia sells 500 and Ericsson 800; if both firms price at 90, then sales are 800 and 900, respectively; if Nokia prices at 100 and Ericsson at 90, then Nokia's sales drop to 400, whereas Ericsson's increase to 1100; finally, if Nokia prices at 90 and Ericsson at 100 then Nokia sells 900 and Ericsson 700.
(a) Suppose firms choose prices simultaneously. Describe the game and solve it.
(b) Suppose that Ericsson has a limited capacity of 800k units per quarter. Moreover, all of the demand unfulfilled by Ericsson is transferred to Nokia.
How would the analysis change?
(c) Suppose you work for Nokia. Your Chief Intelligence Officer (CIO) is unsure whether Ericsson is capacity constrained or not. How much would you value this piece of info?