In the island nation of Autarka, there are two amusement parks: Alfonso's Wonderland and Bernice's Wild Rides. The amusement parks are located at either end of the island, 1km apart.
Recently, a third rm, VendorCorp, has developed a new automation technology that promises to improve the efficiency of amusement park rides. VendorCorp is offering to sell exclusive rights to this technology and has asked the two parks to submit bids.
The new technology promises to reduce the marginal cost of operating rides for a customer by $6. However, experience in other countries has shown that, in about 30% of amusement parks, the technology encounters compatibility issues and only reduces the marginal cost by $3. Unfortunately, there is no way to know whether these issues will be encountered until the technology is installed.

In Autarka there are 9600 people who like to visit an amusement park. Each of these consumers wants to visit one park once. The consumers' homes are evenly spaced across the island, and they each su er a disutility of $24 for each kilometer they travel to reach an amusement park.
With their current technology, it costs an amusement park $12 for each customer they host. At present, the equilibrium price for an amusement park ticket is $36, and each rm has a pro t of $115,200.
This market is best modelled as Hotelling competition. You should neglect xed costs throughout your analysis.
Note: For the purposes of this assignment you should treat this market as a one-shot game. Do not consider repetition or associated phenomena such as collusion or predatory pricing.

2.1 Your task
You have been hired by Alfonso's Wonderland to analyze the business case for purchasing exclusive rights to automation technology. You have been asked to determine:
ˆThe maximum price Alfonso's Wonderland should be willing to pay for the technology.
ˆThe price that Alfonso's Wonderland is likely to have to pay if it is successful.
ˆThe consequences for Alfonso's Wonderland if Bernice's Wild Rides purchases the exclusive rights instead of Alfonso's Wonderland.

In the analysis section, you must complete each of the steps detailed below. When completing the steps you must:

Step 1: Derive an expression for the location of the indi erent consumer. Use PA to represent the price of admission at Alfonso's Wonderland, and PB to represent the price of admission at Bernice's Wild Rides. (2 marks)
Step 2: Find the pro t function for Bernice's Wild Rides. You should assume that Ber- nice's marginal cost is $12. (4 marks)
Step 3: Find Bernice's best-response function. (4 marks)
Step 4: Find the pro t function for Alfonso's Wonderland for the case in which their marginal cost is $6. (4 marks)
Step 5: Find the best-response function for Alfonso's Wonderland for the case in which their marginal cost is $6. (4 marks)
Step 6: Find the equilibrium prices and pro ts for the case in which Alfonso's marginal cost is $6 and Bernice's marginal cost is $12. (7 marks)
Step 7: Find the pro t function for Alfonso's Wonderland for the case in which their marginal cost is $9. (4 marks)
Step 8: Find the best-response function for Alfonso's Wonderland for the case in which their marginal cost is $9. (4 marks)
Step 9: Find the equilibrium prices and pro ts for the case in which Alfonso's marginal cost is $9 and Bernice's marginal cost is $12. (7 marks)

Answer rating: 100% (QA)

Step 1 Derive an expression for the location of the indifferent consumer Use PA to represent the pri... View the full answer