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

Define solvency margin, In relation to solvency margins in the insurance in...

In relation to solvency margins in the insurance industry, the solvency margin is the amount of regulatory capital an insurance undertaking is obliged to hold against unforeseen ev

Motives of regional financial institutions, Motives of regional financial i...

Motives of regional financial institutions: There are mixed motives for the donor countries to provide development assistance to developing nations. While a desire for poverty

Curvature of the iso-quant, Curvature of the Iso-quant: An iso-qunat i...

Curvature of the Iso-quant: An iso-qunat is convex to the origin. This is so because as more and more units labour are employed, the producer would prefer to give up less and

Economic applications project, Within analysis of perfect competition, we d...

Within analysis of perfect competition, we distinguish between the short run and the long run on the basis that use of some input factors is fixed in the short run, but variable in

Calculate the output per dollar wage and unit labor cost, Using the Wage Ra...

Using the Wage Rate and Output per Hour as indicated on the table below, calculate the output per dollar wage and unit labor cost. Then decide on the optimal wage rate for this c

Demand and suply, draw the following diagrams and explain their shapes: the...

draw the following diagrams and explain their shapes: the production possibilities frontier a demand curve the demand curve for a firm in perfect competition the demand curve for a

Stoichiometry , Mg(OH)2 + 2HCl-----> MgCl2 +2H2O how many grams of magnesiu...

Mg(OH)2 + 2HCl-----> MgCl2 +2H2O how many grams of magnesium chloride can be produced from 14.60mL of a 0.546M hydrogen chloride solution?

Problems using point elasticity, Problems Using Point Elasticity - We m...

Problems Using Point Elasticity - We may need to compute price elasticity over portion of demand curve instead of at a single point. - The price and quantity used as base wi

Factors responsible for policy failures, FACTORS RESPONSIBLE FOR POLICY FAI...

FACTORS RESPONSIBLE FOR POLICY FAILURES: It is the subject of many official and academic studies to try and find out the reasons for the inability of many, in fact, most of th

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