Suppose you live in a town with only two gasoline stations, one of which you own.
The next nearest gasoline station is in a town 300 miles away.
Facts:
The current price of gasoline charged by your station and the station across the street is $3.50 per gallon.
The number of gallons sold at that this price is a total of 2,000 gallons per week.
You and your competitor have a 50 percent market share of the gasoline sold in the town.
Assume:
When the price of gasoline increases or decreases by $0.50, 150 total gallons will increase or decrease congruent with the law of demand.
When there is a $0.50 price difference between you and your competitor, their will be a 10 percent change in market share from one firm to the other.
1. What is the total weekly revenue earned by each station when the market price is $3.50?
2. You decide that you could make more money if you increased you price per gallon to $4.00 per gallon.
Will you actually earn more total revenue?
What do you predict you competitor to do?
If your competitor follows your lead, how much will each firm earn?
If your competitor does not follow your lead, how much will each firm earn?
3. Now you now decide that you need to earn back you customer's loyalty and set your price at $3.00 per gallon.
What do you predict you competitor will do given your price reduction?
What is the total revenue each firm will earn given their respective pricing strategies?