One strategy that firms often strive for is what is called "product differentiation". where a firm. either through advertising or other means. convinces consumers that it's product is different than what other firms are offering. One question is whether or not differentiating one's product translated into increased profitability. which would explain such behavior by rms. To investigate this question, note that if two firms in the same industry have differentiated products. then each will demand a possibly different price in the market. Hence. let us describe Firm 1 and Firm 2's demand curves as P12100Q1[3Q2 P22100f3Q1Q2 respectively. where the term [3 represents how much the other firm's production affects the demand for my product. Notice that when ,6: O . the demand for each rm does not depend on the output of the other rm at all. so that each rm is in essence a monopoly. On the other hand, iffi' is very large. then the demand for each rm can increase or decrease by large amounts depending on what the other firm does. Therefore, we may interpret this as follows: The more a rm can differentiate it's product. the smaller the {J' term, and the more it has monopoly power. Let us investigate whether differentiating our product is a protable venture. To that end. given the demand curves above, it follows that for each firm that we have MRlzlooZQlgj .MR1210013Q12Q3 Also, if we assume that TC(Q )=0 TC( 0 ) = 02 it follows that MC(Q) =20 MC(Q,) =202 Solve for each firm's best response function given the information above. O BR : 0 =100--02 B 2' BR : Q = 100 - - 4