2. Suppose that two products, i= 1, 2, are located at the extreme ends of the [0,1] interval. Let li denote the location of the product and x the consumer locations. Consumers buy one unit and are uniformly distributed on the unit interval; their indirect utility is given by r - pit |li - xl, where r is the willingness to pay, pi the price set by firm i, and t a parameter that measures the disutility from not consuming their ideal product. Marginal cost of production is constant and equal to c. Solve for the Stackelberg equilibrium in prices where the firm located at zero is the leader firm. Is there an advantage for being a price leader, that is, is there a first-mover advantage? Why? Explain. Compare the results with simultaneous choice of prices.

2. Suppose that two products, i= 1, 2, are located at the extreme ends of the [0,1] interval. Let li denote the location of the product and x the consumer locations. Consumers buy one unit and are uniformly distributed on the unit interval; their indirect utility is given by r - pit |li - xl, where r is the willingness to pay, pi the price set by firm i, and t a parameter that measures the disutility from not consuming their ideal product. Marginal cost of production is constant and equal to c. Solve for the Stackelberg equilibrium in prices where the firm located at zero is the leader firm. Is there an advantage for being a price leader, that is, is there a first-mover advantage? Why? Explain. Compare the results with simultaneous choice of prices.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter6: Demand Relationships Among Goods

Section: Chapter Questions

Problem 6.14P

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