Suppose three firms face the same total market demand for their identical product.

This demand is: P Q $80 20,000 70 25,000 60 30,000 50 35,000

Suppose further that all three firms are selling their product for $60 and each has about one-third of the total market. One of the firms, in an attempt to gain the market share at the expense of the others, drop its price to $50. The other two quickly follow it.

a. What impact would this move have on the profit of all three firms? Explain your reasoning.

b. Would these firms have been better off in terms of profit if they all had raised the price to $70? Explain.