Reference no: EM13684351
There are two movie theatres in the town of Harkinsville: Modern Multiplex, a first-run theatre, and Sticky Shoe, which shows movies that have been out for a while at a cheaper price. The demand for Modern Multiplex is given by: QMM = 14 – PMM + PSS, while the demand for Sticky Shoe is: QSS = 8 – 2PSS + PMM, where prices are in dollars and quantities are gauged in hundreds of moviegoers. Modern Multiplex has a per-customer cost of $4, while Sticky Shoe has a per-customer cost of only $2.
1. From the demand equations alone, what indicates whether Modern Multiplex and Sticky Shoe offer services that are substitutes or complements?
2. Write the profit function for each theatre in terms of PSS and PMM. Discover each theatre’s best-response rule.
3. Discover the Nash equilibrium price, quantity, and profit for each theatre.
4. What would each theatre’s price, quantity, and profit be if the two decided to collude to maximize joint profits in this market? Why isn’t the collusive outcome Nash equilibrium?
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