Consider firms that can choose where to locate along a linear product space indicated by the line
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Question:
Consider firms that can choose where to locate along a linear product space indicated by the line [0,1]. The total number of customers along the product space is equal to M and we assume that M=1. Assume that firms can enter a market but doing so incurs a fixed cost equal to f where f=(1/6). These fixed costs are sunk and cannot be recovered once entry occurs. New firms enter the market if they expect positive economic profit. Finally, assume that the price of the good is fixed and equal to 1. Show that if three firms enter the market and space themselves at 1/6, 3/6 and 5/6, no other firm can profitably enter the market. How much profit will each of the three firms earn?
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