problemset6 - EC332 Fall 2009 Prof Jordi Jaumandreu Problem...

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EC332, Fall 2009, Prof. Jordi Jaumandreu Problem set #6 Product Di ff erentiation and Advertising 1. Consider the model of di ff erentiation on the line. The two fi rms locations are fi xed, and they are the two extremities of the segment. Transportation costs are linear in distance and equal to , and the distribution of consumers is uniform along the segment. The fi rms have constant marginal costs 1 and 2 a. Compute the reaction functions = ( ) b. Infer the Nash-equilibrium prices c. Give the pro fi ts as a function of the two marginal costs. 2. Two fi rms with di ff erentiated products compete in prices with demands 1 = 1 1 +0 5 2 and 2 = 1 2 +0 5 1 Suppose that both fi rms can produce at the same constant marginal cost  a. Draw the best response functions. b. Find the prices corresponding to the Bertrand-Nash equilibrium. 3. Assume a discrete choice model for two products. Consumer utility derived from product has the form
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