Consider a main street, which is 1 mile long. There are N people uniformly distributed along the main street. Each customer either buys one unit of product from one of the two firms located at either end of the main street every day or buys nothing. If a customer buys no product, her utility will be zero. Each customer’s reservation utility of consuming this product is $V. Each customer’s there and back transportation cost is $t per mile. Suppose that Firm 1 is located at the left-end of the street and Firm 2 is located at the right-end of the street. Let the marginal cost of producing one unit of product is $c for both firms. Identify the equilibrium prices and profits when these two firms choose their prices simultaneously.

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To solve for the equilibrium prices and profits for both Firm 1 and Firm 2 lets start by using the ... View the full answer