Chapter 2 Flashcards
A marketer is more interested in figuring out how to serve what?
the one person or the two-person household, or perhaps larger households, keeping mind that the needs and preferences are likely to be quite different for households of different sizes.
Duopoly
Think of two sellers competing in a market. This situation is a duopoly since there are two competitors.
How are price and demand related?
Inversely
if the competitor chooses a price higher than cost c, then it is best for firm 1 to…
…slightly undercut the competitor by ε and get the entire demand D.
Bertrand Paradox
This result that when firms choose prices, they go at each other until they reduce price to cost
firms can make positive profits by choosing…
…quantity rather than price.
What are pitches designed for?
For consumers to sort themselves into preference buckets, some preferring one brand and others a different brand. And this situation would occur even with brands charging different prices.
Horizontal Differentiation
The brands are differentiated and this differentiation is not about one brand being “superior” to all others. It is about catering to different preferences.
In such a situation, even if all the products are priced equally, some consumers would prefer one product and others a different one. Of-course the heterogeneity in consumer preferences is a key factor that determines how firms compete.
How to get away from Bertrand Paradox
Since the equilibrium prices are higher than the marginal cost c, we no longer have the Bertrand paradox. In other words, because the products are differentiated, firms are able to make positive profits.
What is a key factor for profitability?
The strength of consumer preferences
More differentiation also increases…
…profits for a given strength of consumer preferences. This means that firms can also compete by the extent of horizontal differentiation.
