Question

The Hull Petroleum Company and Inverted V are retail gasoline franchises that compete in a local market to sell gasoline to consumers. Hull and Inverted V are located across the street from each other and can observe the prices posted on each other’s marquees. Demand for gasoline in this market is Q = 50 -4P, and both franchises obtain gasoline from their supplier at $4.00 per gallon. On the day that both franchises opened for business, each owner was observed changing the price of gasoline advertised on its marquee more than 10 times; the owner of Hull lowered its price to slightly undercut Inverted V’s price, and the owner of Inverted V lowered its advertised price to beat Hull’s price. Since then, prices appear to have stabilized. Under current conditions, how many gallons of gasoline are sold in the market, and at what price? Instructions: Enter your responses rounded to the nearest two decimal places.

Gallons sold:

Price: $

How would prices differ if Hull had service attendants available to fill consumers’ tanks but Inverted V was only a self-service station?

Price will not change. Price will go down. Price will go up.

Answer 1

Demand function is as follows -

Q = 50 - 4P

4P = 50 - Q

P = (50 - Q)/4

P = 12.5 - 0.25Q

MC = $4

There are only two firms and both firms sell homogeneous product. So, situation is that of Bertrand oligopoly.

Equilibrium in Bertrand oligopoly is attained at,

P = MC

12.5 - 0.25Q = 4

0.25Q = 8.5

Q = 8.5/0.25

Q = 34

P = 12.5 - 0.25Q = 12.5 - (0.25*34) = 12.5 - 8.5 = 4

Thus,

The gasoline sold is 34 gallons.

The price is $4 per gallon.

If one gasoline station has service attendants while other is self-service station then, in that case, they both had differentiation in product offering.

This will give them some market power and due to this price will increase.

Thus,

The price will go up.