1. Before there was the lockdown, there were (they are stillthere, just not serving any coffee) two...
Question:
1. Before there was the lockdown, there were (they are stillthere, just not serving any coffee) two busy coffee shops in SFUWest Mall, Starbucks & its rival Tim Horton’s. Think about theWest Mall coffee sellers’ rivalry using a simple Hotelling model:Starbucks coffee is valued by each customer at VS = $10/cup andeach customer would buy exactly 1 cup a day if the full price isless than the value & the consumer surplus of buying fromStarbucks is lower than the consumer surplus of buying from TimHorton’s. Tim Horton’s coffee is valued by each customer at VT =$8/cup and each customer would buy exactly 1 cup a day if the fullprice is less than the value & the consumer surplus of buyingfrom Tim Horton’s is lower than the consumer surplus of buying fromStarbucks. There are 2,000 customers evenly spread along the WMXhall. For each the cost of travel is $2 per length of the hall.Starbucks is located at the East end of the hall, Tim Horton’s islocated at the West end of the hall. It costs Starbucks $2 to makeeach cup of coffee, and it costs Tim Horton’s $1 to make each cupof coffee. The two shops choose their prices in a simultaneous-moveBertrand duopoly. Find the equilibrium prices the two coffee shopscharge, the equilibrium quantities of coffee each one of themsells, and their profits (assuming no fixed costs).
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta