16. Assume that two clothing manufacturers, Lands’ End and L.L. Bean, market their goods strictly by mail order. Each produces an essentially identical field coat. The cost of producing such a coat is exactly $100.

Because the field coats are perfect substitutes, customers will flock to the seller that offers the lowest price.

If both firms offer identical prices, each receives half the customers.

For simplicity, assume that the two firms have the choice of pricing at whole-dollar prices of $103, $102, or $101. Market demand at $103 is 100 coats; at $102, 110 coats, and at $101, 120 coats. The profit each firm would earn at various prices is shown in the payoff matrix below:

a. What is the equilibrium outcome of the game Lands’ End and L.L. Bean are playing?

b. Is collusion between Lands’ End and L.L. Bean likely to last?

c. If Lands’ End and L.L. Bean were allowed to quote prices in cents rather than whole dollars, what would the likely outcome of this game be?

d. Suppose that in hopes of raising prices above equilibrium, L.L. Bean decides to announce the price for its field coat early in the summer. Will that strategic move be successful for L.L. Bean? Why or why not?

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L.L. Bean $103 $102 $101 $103 $150, $150 $0, $220 $0, $120 $102 $220, $0 $110, $110 $0, $120 Lands' End $101 $120, $0 $120, $0 $60, $60