Consider the market for a new snack food produced by two firms: Taste-tastic and Yumm. Although the snacks are quite similar, Taste-tastic's snacks have a stronger chocolate flavor than Yumm's snacks. To illustrate how each firm chooses a price for its snack, the following graph presents each firm's best-response function.
Now suppose that both firms discover that the majority of consumers prefer a level of chocolate in-between the levels currently provided by each, and thus Taste-tastic reduces the amount of chocolate it uses, and Yumm increases the amount of chocolate. In this case, the resulting equilibrium price for both firms will be (Blank: Less than, Equal to, Greater than) the price predicted when the products are more differentiated.
True or False: If consumers started caring more about product differentiation, the equilibrium price would move closer to marginal cost.
- Multiple choice in bold
- Please back up your answers.
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