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43* (Vertical product differentiation, two varieties) Find equilibrium prices, quantities demanded, and profits in the two-variety model of Section 4.3 if the parameters of the model take the values given in Figure 4.10. 4.3 VERTICAL PRODUCT DIFFERENTIATION 115 Figure 4.10 Quality differences, best-response curves, and sales area boundaries in a market with two vertically differentiated varieties (XL = 1, x1 = 2, x2 = 4, Xu = 16, PL = 1, Pu = 100; prices measured as deviations from constant marginal cost) P2 2's best- response P2 curve *xu 1's best- response curve w P1 (a) Quality ranking (b) Best-response curves 8 0 VL1 max V2u V12 (c) Sales area boundaries 4.3 Vertical Product Differentiation In markets with vertically differentiated products, consumers share a universal quality rank- ing. This would describe a market in which all consumers agree that a personal computer with more memory is of higher quality than a personal computer with less memory, all else equal, or a market in which all consumers agree that a more durable ink-jet printer is of higher quality than a less durable ink-jet printer, all else equal. 4.3.1 Setup accelerate more or less rapidly, be more or less fuel-efficient. Describing different varieties Varieties of a product will differ in many ways-different car models are larger or smaller. of a product in terms of differences in a single quality measure is a way of compressing multidimensional product differentiation into one dimension, and this is the approach that is taken here. Write, then, x; for the quality of new car model i. For expositional purposes, we consider a market where there are two types of new cars on the market, model 1 of lower quality and model 2 of higher quality, as shown in Figure 4.10(a): X1