Product differentiation, Microeconomics

Assignment Help:

Question: Product differentiation and entry/exit

Two differentiated goods, apples and oranges, are located at the two extremes of a linear product space (a segment of length 1) (i.e., apples at 0 and oranges at 1). The price of apples is p1, the price of oranges is p2. The utility of a consumer located at t that consumes one apple is

43_Product differentiation.png

The utility of a consumer located at t that consumes one orange is

972_Product differentiation1.png

The utility of a consumer located at t that consumes nothing or both apples and oranges is zero. Consumers are located uniformly along the segment. (This is exactly like the transportation model, where spatial preferences are reinterpreted as tastes and 'transportation costs' are quadratic.). The unit cost of transportation is c. The marginal cost of each good is μ. Assume that Firm 1 is an apple monopoly, ?rm 2 is an orange monopoly.

(a) Calculate the demand functions for apples and oranges. For what ranges of prices the demands are well de?ned?

(b) Consider the demand functions for apples and oranges that you have calculated in the previous part. Assume that ?rms set prices simultaneously. Write the maximization problem of ?rm 1 and ?rm 2.

Solve for the Bertrand equilibrium. Compute prices, equilibrium quantity demanded and the pro?ts.

Suppose now that ?rm 1 is an apple monopoly, but that both ?rms produce oranges.

(c) Compute the equilibrium. Show that the pro?tof ?rm1issmaller(by a factor of4)than in part

(b). Explain step by step.

(d) Suppose that there are no exit costs, that entry costs are sunk, that ?rm1 is in bothmarkets,and that ?rm 2 is in the orange market (as in part (c)). Which ?rm has an incentive to exit the orange market? What do you conclude about the role of sunk costs or exit costs with regard to the possibility of entry deterrence through product differentiation (e.g., ?rm 1 entering ?rst in orange markets).


Related Discussions:- Product differentiation

Assignment , I need someone to solve my assignment

I need someone to solve my assignment

Theory of production, when total production fall what,s the status of avera...

when total production fall what,s the status of average product and marginal product

Why a high level of labor force growth is correlated, Why a high level of l...

Why a high level of labor force growth is correlated A high level of labor force growth is correlated--even though less powerfully--with a low level of output per worker. The a

Need Homework help, If I submit an economics problem(Home work), How soon i...

If I submit an economics problem(Home work), How soon it will be answered?

Explain the development process of a developing country, Explain how foreig...

Explain how foreign aid might help in the development process of a developing country. Definition/outline of various forms of aid, i.e. donor aid, tied aid, bilateral aid etc.

Second best theory, what is the theory of second best?prove the theorm with...

what is the theory of second best?prove the theorm with the help of diagram?

Define Amagat law of partial volume, Define Amagat law of partial volume, ...

Define Amagat law of partial volume, Amagat law of partial volume The total volume of a mixture of non reacting gases at constant temperature & pressure is equal to sum of indiv

The great depression, How did fixed exchange rates and the Golden Standard ...

How did fixed exchange rates and the Golden Standard affect the U.S. economy as well as other countries.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd