1. You have been hired by a manager of a firm (entrant) to choose the location of a company branch along an avenue. A rival firm (incumbent) is located at one end of the avenue. Consumers face transportation costs according to td, where t represents transportation costs and d; the distance. The entire length of the avenue is assumed to be 1. Consumers are uniformly distributed along the avenue. It is assumed that firms choose their respective location and then compete à la Bertrand. Marginal costs are zero for both firms. a) Find equilibrium prices in the second stage of the game. b) Find the optimal location for the entrant firm.

1. You have been hired by a manager of a firm (entrant) to choose the location of a company branch along an avenue. A rival firm (incumbent) is located at one end of the avenue. Consumers face transportation costs according to td, where t represents transportation costs and d; the distance. The entire length of the avenue is assumed to be 1. Consumers are uniformly distributed along the avenue. It is assumed that firms choose their respective location and then compete à la Bertrand. Marginal costs are zero for both firms. a) Find equilibrium prices in the second stage of the game. b) Find the optimal location for the entrant firm.

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter11: Price-searcher Markets With High Entry Barriers

Section: Chapter Questions

Problem 12CQ

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