Nash equilibrium is

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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EXERCISE 75.1 (Competition in product characteristics) In the variant of Hotelling's
model that captures competing firms' choices of product characteristics, show that
when there are two firms the unique Nash equilibrium is (m, m) (both firms offer
the consumers' median favorite product) and when there are three firms there is no
Nash equilibrium. (Start by arguing that when there are two firms whose products
differ, either firm is better off making its product more similar to that of its rival.)
Transcribed Image Text:EXERCISE 75.1 (Competition in product characteristics) In the variant of Hotelling's model that captures competing firms' choices of product characteristics, show that when there are two firms the unique Nash equilibrium is (m, m) (both firms offer the consumers' median favorite product) and when there are three firms there is no Nash equilibrium. (Start by arguing that when there are two firms whose products differ, either firm is better off making its product more similar to that of its rival.)
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