Consider a two firm differentiated product environment where firms choose their price but not their product...

 

Transcribed Image Text:

Consider a two firm differentiated product environment where firms choose their price but not their product type. The product is differentiated in one dimension: in particular, the good can take on types ranging from zero to one. As we saw in class, consumers derive an inherent utility from consuming one unit of the good (5), pay a price p; for it (where i can be either 1 or 2, depending which firm they are buying from) and incur in a linear adjustment cost (dis-utility) of t = 1 when deviating from their favorite type. Consumer types are identified with the parameter which is distributed uniformly in the [0,1] interval. Suppose firms' cost functions are as follows: C(91) aq + F and C(92) = aq2+ F. Suppose firm 1 is forced to locate at point 0 and firm 2 is forced to locate at point 1. = What is the optimal price that each firm will set? b) Assume now that a = 1 and F = 0.2. What are the profits for each firm? Consider a two firm differentiated product environment where firms choose their price but not their product type. The product is differentiated in one dimension: in particular, the good can take on types ranging from zero to one. As we saw in class, consumers derive an inherent utility from consuming one unit of the good (5), pay a price p; for it (where i can be either 1 or 2, depending which firm they are buying from) and incur in a linear adjustment cost (dis-utility) of t = 1 when deviating from their favorite type. Consumer types are identified with the parameter which is distributed uniformly in the [0,1] interval. Suppose firms' cost functions are as follows: C(91) aq + F and C(92) = aq2+ F. Suppose firm 1 is forced to locate at point 0 and firm 2 is forced to locate at point 1. = What is the optimal price that each firm will set? b) Assume now that a = 1 and F = 0.2. What are the profits for each firm?

Answer rating: 100% (QA)

To solve this problem we need to follow the steps to find the optimal prices and profits for the two ... View the full answer