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In a strategy meeting, the Chief Operating Officer (COO) discusses production planning for the next year. She observes that, in recent years, the price we could charge depended not only on our own, but also on the main competitor's, decisions. When they supplied a lot of product, the price would drop. In fact, the behavior of the price has been estimated as follows: P = 630 - 15q1 - 15q2, where P is the market price, q₁ is the quantity sold by your company, and q2 is the quantity sold by your competitor. Since the price impacts the profitability of our choices, the COO says we need to plan flexibly until we get some sense of how the competitor is planning. You are being tasked with designing a strategy that responds to each possible output level q2 of the competitor with our best response q₁. In order to solve this problem, you decide to model the industry as a Cournot duopoly and find your company's reaction function. You shoot a quick e-mail to the COO to find out about costs of production. It turns out that the cost increases with every additional unit that is produced and can therefore be expressed as MC₁ = 5q1. The competitor uses the same technology and therefore has the same cost structure (i.e. MC2 5q2). Based on these data, you derive the reaction function for your firm as:

In a strategy meeting, the Chief Operating Officer (COO) discusses production planning for the next year. She observes that, in recent years, the price we could charge depended not only on our own, but also on the main competitor's, decisions. When they supplied a lot of product, the price would drop. In fact, the behavior of the price has been estimated as follows: P = 630 - 15q1 - 15q2, where P is the market price, q₁ is the quantity sold by your company, and q2 is the quantity sold by your competitor. Since the price impacts the profitability of our choices, the COO says we need to plan flexibly until we get some sense of how the competitor is planning. You are being tasked with designing a strategy that responds to each possible output level q2 of the competitor with our best response q₁. In order to solve this problem, you decide to model the industry as a Cournot duopoly and find your company's reaction function. You shoot a quick e-mail to the COO to find out about costs of production. It turns out that the cost increases with every additional unit that is produced and can therefore be expressed as MC₁ = 5q1. The competitor uses the same technology and therefore has the same cost structure (i.e. MC2 5q2). Based on these data, you derive the reaction function for your firm as:

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter3: Demand Analysis
Section: Chapter Questions
Problem 1E: The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales...
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In a strategy meeting, the Chief Operating Officer (COO) discusses production planning for the next year. She observes that, in recent years, the price we could charge depended not only on our own, but also on the main competitor's, decisions. When they supplied a lot of product, the price would drop. In fact, the behavior of the price has been estimated as follows: P = 630-15q1 - 15q2, where P is the market price, q₁ is the quantity sold by your company, and q2 is the quantity sold by your competitor. Since the price impacts the profitability of our choices, the COO says we need to plan flexibly until we get some sense of how the competitor is planning. You are being tasked with designing a strategy that responds to each possible output level q2 of the competitor with our best response q₁. In order to solve this problem, you decide to model the industry as a Cournot duopoly and find your company's reaction function. You shoot a quick e-mail to the COO to find out about costs of production. It turns out that the cost increases with every additional unit that is produced and can therefore be expressed as MC₁ = 5q1. The competitor uses the same technology and therefore has the same cost structure (i.e. MC2 = 5q2). Based on these data, you derive the reaction function for your firm as: Oq118 -0.592 O q1 23-0.892 Oq1= 280 - 592 91 = 315 - 1592
Transcribed Image Text:In a strategy meeting, the Chief Operating Officer (COO) discusses production planning for the next year. She observes that, in recent years, the price we could charge depended not only on our own, but also on the main competitor's, decisions. When they supplied a lot of product, the price would drop. In fact, the behavior of the price has been estimated as follows: P = 630-15q1 - 15q2, where P is the market price, q₁ is the quantity sold by your company, and q2 is the quantity sold by your competitor. Since the price impacts the profitability of our choices, the COO says we need to plan flexibly until we get some sense of how the competitor is planning. You are being tasked with designing a strategy that responds to each possible output level q2 of the competitor with our best response q₁. In order to solve this problem, you decide to model the industry as a Cournot duopoly and find your company's reaction function. You shoot a quick e-mail to the COO to find out about costs of production. It turns out that the cost increases with every additional unit that is produced and can therefore be expressed as MC₁ = 5q1. The competitor uses the same technology and therefore has the same cost structure (i.e. MC2 = 5q2). Based on these data, you derive the reaction function for your firm as: Oq118 -0.592 O q1 23-0.892 Oq1= 280 - 592 91 = 315 - 1592
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