5) Capacity and Prices You are a manufacturer of large disk drives with only one

Question

5) Capacity and Prices You are a manufacturer of large disk drives with only one competitor in your market, DD. (Large disk drives are all very similar, so there is relatively ätle differentiation) You and your competitor both produce your own drives. How many drives you can produce will be liited by the production capacity you have installed. While you can produce less than your capacity, you can never produce more than your capacity. You will have to choose your production decisions. The market is sufficiently transparent that you know DD's capacity and they capacity long before you make actual price and know yours. To simplify the discussion, let production capacity be completely free. So the only effect of choosing capacity is that you limit how much you can produce in the future. Actual production is very flexible, so you can adjust your production levels to the demand that materializes (up to your production capacity). The cost of production is $10 per drive for both you and DD. There is no fixed cost. Your competitor DD has already (irreversibly) chosen its production capacity it will be able to produce at most 100,000 drives which allows it to serve the whole market, if needed. You now have to choose your production capacity. In terms of price setting, the scenario is that you first set your price and then DD responds. (Based on both your prices, actual orders get generated. Both you and DD then produce these orders up to your production capacity. Any demand that you can't fiulfill will buy from DD and the other way around.) Please find your best capacity level and price. (You can try out different capacity levels and prices to apac oice ce Competition ) Number of Competitors 5) Capacity and Prices READY

Explanation / Answer

Your capacity- 100, DD capacity-100, Your price- 15, DD price- 13, Your quantity- 60, DD quantity- 40, Your profit-60*15-100*10= -100, DD profit= 100*10- 40*13=-480

Your capacity- 40, DD capacity-60, Your price- 15, DD price- 13, Your quantity- 40, DD quantity- 60, Your profit-40*15-40*10= 200, DD profit= 60*13- 60*10=-180

a- There is advantage is limiting the capacity which will decrease the cost and increase the revenue and profitability will be increased.

b-There will be price war between DD and us which will eroded profitability and both will suffer huge loss. If secretly we have change the capacity then the effect will be dependent on my move whether I increased the capacity or not.

c- In making contract with DD we can manipulate the price and set the production level according to our demand level. It will increase the profitability for both of us. Such cartel become useful for the producer but not good for the consumer.

c- If there will be any informal or formal contract with my competitor I will try to convince my competitor about the competition and how both will suffer a lot due to the competition. It will be better if we will make a contract and produce accordingly.

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