Question

PROBLEM 2: Consider two stores operating along a one (1) mile street, one at the left end and the other at the right end. Both stores sell a single product, which costs $10 to produce (c = $10). Transport costs for each consumer = $5 per mile (t = $5). There are 100 consumers spread out equally along the street. Prices are set at a point that ensures all consumers are serviced.

a. Assume prices are set simultaneously. The profit-maximizing price is p1 = p2 = c + t. What are both stores’ prices? And given that both stores split the market, how much profit does each store make (assume $0 fixed costs).


b. Now assumed the store on the Left moves first to set its price. The store on the Right then follows. Use the information below to determine each store’s price, the quantity it sells and its profits (again assume NO fixed costs).

First Mover p1 = c + 3t/2 Demand 1 (q1) = [(p2 – p1 + t)*N]/2t

Second Mover p2 = c + 5t/4 Demand 2 (q2) = [(p1 – p2 + t)*N]/2t


c. In Part b, who is better off, the Left Store (1st mover) or the Right (follower)? How does the outcome in Part b compare to the outcome in Part a. Is the store on the Right better or worse off? What about the store on the Left

Answer 1