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Rippin’ Good Cookies is based in Ripon, WI. They give free samples! As of January 2013, Girls Scouts of Wisconsin Southeast became their main competitor after adopting a direct sales model. Girl Scouts now bring cookies door-to-door rather than only accepting orders for later delivery. Suppose the inverse market demand for cookies is given by Q = 3600 − 6P and initially both produce at equal marginal cost, c0.
1. Find the price that each should set if they compete as Bertrand firms (in price).
2. Assuming initially c0 = 375. Suppose now that Rippin’ Good invests heavily in R&D and reduces its unit production cost to c1 = 200. What price should Rippin’ Good set and how is the market divided between them and Girl Scouts? Is this a large or small innovation?
3. Suppose now that Rippin’ Good invests heavily in R&D and reduces its unit production cost to c2 = $100. Assuming initially c0 = 375, what will be Rippin’ Good’s optimal price and quantity after the cost-saving innovation? Is this a large or small innovation?
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