Consider two firms. One firm is a monopolist in the market for DVD players; the other firm is a monopolist in the market for DVD movies. The price of a DVD player is pP; the price of one DVD movie is pM. Market research shows that people who buy a DVD player also buy 5 DVD movies. Therefore, the quantities demanded of DVD players and DVD movies depend on pP and pM. Assume that demand for DVD players is given by DP(pP, pM) = 150 – pP – 5 pM , and demand for DVD movies is given by DM(pP, pM) = 5 DP(pP, pM) = 750 – 5 pP – 25 pM. Marginal costs and fixed are zero for both firms.
Required:
(a) Suppose the two firms choose their prices independently. What prices will the firms choose? How many DVD players and DVD movies will be sold?
(18 marks)
(b) Now suppose that the two firms merge and offer a bundle of one DVD player and 5 DVD movies at a price pB. What price pB will be chosen? How many bundles will be sold?
(18 marks)
(c) Compare your results from parts (a) and (b). Explain why they differ. What else can firms do to achieve better cooperation (apart from merging)?
(14 marks)