(20 marks) 2 stores, Kdyes and Go Connect, are selling homogeneous laptops and compete in price. Kdyes is the entrant, while Go Connect is the incumbent. There are 2 types of consumers, loyal consumers and disloyal consumers. Go Connect has several loyal consumers who are willing to purchase the laptop from Go Connect regardless of the price charged. The mass of loyal customers is denoted as . The disloyal customers can search the price of Kdyes and Go Connect and buy the lowest one. If they do not search, the disloyal customers will buy one from Go Connect with a probability of 32 or buy one from Kdyes with probability of 31. The mass of disloyal customers is 1 . Let PK denote price charged by Kdyes and PG denote the price charged by Go Connect where PKPG as Go Connect has lower incentive to attract disloyal consumers. Go Connect cannot discriminate between loyal and disloyal consumers. The disloyal customers have search cost t, where t is the amount of time devoted to search activities and is the opportunity cost of search. is uniformly distributed over the interval [0,1]. Assume customers value the laptop at k. a. Write down the expected utility of disloyal customer who search and the expected utility of disloyal customer who did not search. b. Find of the indifferent consumer. c. Assume 0 cost of production for both Stores. Write down the profit functions of Kdyes and Go Connect. d. Solve for the equilibrium price maximizing PK and PG. (20 marks) 2 stores, Kdyes and Go Connect, are selling homogeneous laptops and compete in price. Kdyes is the entrant, while Go Connect is the incumbent. There are 2 types of consumers, loyal consumers and disloyal consumers. Go Connect has several loyal consumers who are willing to purchase the laptop from Go Connect regardless of the price charged. The mass of loyal customers is denoted as . The disloyal customers can search the price of Kdyes and Go Connect and buy the lowest one. If they do not search, the disloyal customers will buy one from Go Connect with a probability of 32 or buy one from Kdyes with probability of 31. The mass of disloyal customers is 1 . Let PK denote price charged by Kdyes and PG denote the price charged by Go Connect where PKPG as Go Connect has lower incentive to attract disloyal consumers. Go Connect cannot discriminate between loyal and disloyal consumers. The disloyal customers have search cost t, where t is the amount of time devoted to search activities and is the opportunity cost of search. is uniformly distributed over the interval [0,1]. Assume customers value the laptop at k. a. Write down the expected utility of disloyal customer who search and the expected utility of disloyal customer who did not search. b. Find of the indifferent consumer. c. Assume 0 cost of production for both Stores. Write down the profit functions of Kdyes and Go Connect. d. Solve for the equilibrium price maximizing PK and PG
