(c) What happens to market share and profits for each firm as a result of the increase in costs at firm 1?

4 Firm 1 and firm 2 sell a similar but differentiated product, charging market price p1 and p2, respectively. Suppose fixed costs are equal to zero, and each firm has the same constant marginal cost

c, so that in equilibrium, each firm charges the Nash equilibrium price given by:

where a

(b) is the location of firm 1’s (2’s) product, 0 < a < b < 1. Suppose firm 1 changes its location and moves closer to firm b (i.e. a increases).