Question 5 FitScan and Actitrack are price-setting firms that produce digital fitness trackers at a marginal cost of 10. Let p1 denote the price of the FitsScan tracker and p2 the price of the Actitrack tracker, which they set simultanously. Demand for FitScan digital fitness trackers is given by q1 = 350+ap2-p1, whereas demand for Actitrack digital fitness trackers is given by q2 = 350 + Bp1 - p2, where a, BE (0, 1). (a) Are FitScan and Actitrack fitness trackers complements or substitutes? Do consumers view the goods of the two firms as homogeneous or differentiated? [4 marks] (b) Find the firms' reaction functions and hence find Nash Equilibrium prices as a function of a and B. How do a and B affect equilibrium prices? [13 marks] (c) Leta = = 0.5. Find the Nash Equilibrium prices, quantities and profit levels [3 marks] (d) FitScan launches an advertising campaign that costs 10, 000, which has the effect of raising a to 0.8, while 3 remains 0.5. Is this a good investment for FitScan? Would Actitrack object to the campaign? [10 marks] (e) Let a = 0.8 and 3 = 0.5 due to the campaign. FitScan proposes they coordinate to both set the price p that maximises industry profit. Is this an attractive proposition for Actitrack? Could collusion be sustained if the game between FitScan and Actitrack were infinitely repeated? [10 marks] (f) The FitScan marketing department notices an increase in the proportion of consumers who return the product for a full refund after the advertising campaign. How might this be explained? [Refer to course reading when answering this question]. [10 marks]