Economics: Industrial Organization and Competitive Advantages

1. Hotelling with quality difference Consider the Hotelling model of location competition only. There is a linear city represented by the unit interval [O, 1] , on which one unit of consumers are uniformly distributed. There are two firms, A and B. Their costs of production are assumed to be zero for simplicity. The price of their goods is exogenously fixed at 1 for both firms. Firm A and B compete by simultaneously choosing their luspectivv locations, denoted by 9 A and 9B. A consumer's payoffs of buying hom Firm A and B are 9.5 -1, where D is the distance that the consumer needs to travel to the firm's location. The payoff of buying nothing is zero. i.e., both firms locating in the middle of (a) Is the strategy profile (GA, 0B) the city, a Nash equilibrium? Explain. (b) Suppose the (xnsumers' payoffs become 10 -21)-1, 8.5 -21) - 1. Is the strategy profile (9 A, 9B) a Nash equilibrium? Explain.