Walmart can be viewed as a first mover. Now suppose both Walmart and HEB are considering whether and how to enter a potential market. Market demand is given by the inverse demand function p= 900−q1−q2, where p is the market price margin, q1 is the quantity sold by Walmart and q2is the quantity sold by HEB. To enter the market, a retailer must build a store. Two types of stores can be built: Small and Large. A Small pantry store requires an investment of $50,000, and it allows the retailer to sell as many as 100 units of the goods at zero marginal cost. Alternatively, the retailer can pay $175,000 to construct a Large full-service supermarket that will allow it to sell any number of units at zero marginal cost. *Assume Walmart has built a Large full-service supermarket there (i.e.Walmartchooses to build a large full-service supermarketL1at the first stage). Calculate HEB’s profit for the following cases: a.) HEB chooses not to enter N′′ at the second stage after viewing Walmart’s choice. b.) HEB chooses to build a small pantry store S′′ at the second stage after viewing Walmart’s choice. c.) HEB chooses to build a Large full-service supermarket L′′ at the second stage after viewing Walmart’s choice. *For B and C, may consider that both retailers behave as in a Cournot Model with capacity constrain on the smaller one.
Walmart can be viewed as a first mover. Now suppose both Walmart and HEB are considering whether and how to enter a potential market.
Market demand is given by the inverse demand function p= 900−q1−q2, where p is the market price margin, q1 is the quantity sold by Walmart and q2is the quantity sold by HEB.
To enter the market, a retailer must build a store. Two types of stores can be built: Small and Large. A Small pantry store requires an investment of $50,000, and it allows the retailer to sell as many as 100 units of the goods at zero marginal cost. Alternatively, the retailer can pay $175,000 to construct a Large full-service supermarket that will allow it to sell any number of units at zero marginal cost.
*Assume Walmart has built a Large full-service supermarket there (i.e.Walmartchooses to build a large full-service supermarketL1at the first stage). Calculate HEB’s profit for the following cases:
a.) HEB chooses not to enter N′′ at the second stage after viewing Walmart’s choice.
b.) HEB chooses to build a small pantry store S′′ at the second stage after viewing Walmart’s choice.
c.) HEB chooses to build a Large full-service supermarket L′′ at the second stage after viewing Walmart’s choice.
*For B and C, may consider that both retailers behave as in a Cournot Model with capacity constrain on the smaller one.
P = 900 – q1- q2
a) In the first stage, Walmart has a large scale supermarket, and as a result, HEB chooses not to enter,
Therefore profit for HEB will be 0
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