Consider a Hotelling model with linear transportation costs. The consumers are located uniformly along a segment of unit length. There are two Örms, A and B, located at the opposite ends of the segment. Each Örm has zero marginal costs. The prices of the two Örms are equal to 1. The quality of each Örm is denoted qi, i = A;B, and each qi is uniformly and independently distributed over [2; 3]. Each Örm knows the values of both qualities while consumers know only the distribution (unless Örms disclose the quality). The gross valuation of the consumers for each Örm is the expected quality of that Örm given the available information. Their net utility is their gross valuation minus the transportation cost minus the price. Unit transportation costs are equal to 1. a. Suppose that Örms can simultaneously disclose their own quality qi at zero cost. Consumers then decide which product to buy. What is the equilibrium? Carefully explain your derivation and provide economic reasoning where necessary.
Consider a Hotelling model with linear transportation costs. The consumers are located uniformly along a segment of unit length. There are two Örms, A and B, located at the opposite ends of the segment. Each Örm has zero marginal costs. The prices of the two Örms are equal to 1. The quality of each Örm is denoted qi, i = A;B, and each qi is uniformly and independently distributed over [2; 3]. Each Örm knows the values of both qualities while consumers know only the distribution (unless Örms disclose the quality). The gross valuation of the consumers for each Örm is the expected quality of that Örm given the available information. Their net utility is their gross valuation minus the transportation cost minus the price. Unit transportation costs are equal to 1.
a. Suppose that Örms can simultaneously disclose their own quality qi at zero cost. Consumers then decide which product to buy. What is the equilibrium? Carefully explain your derivation and provide economic reasoning where necessary.
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