Recall the Hotelling model of competition on a linear beach from Example 15.5. Suppose for simplicity that ice cream stands can locate only at the two to analyze an entry-deterring strategy involving product proliferation. Both ice cream stands have a constant marginal and average cost of zero. Consider the subgame in which firm A has two ice cream stands, one at each end of the beach, and B locates along with A at the right endpoint. Hint: Bertrand competition ensues at the right endpoint. On the right endpoint of the beach, both firms set price marginal cost and thus, both firms will earn economic profit. Continue to consider the subgame in which firm A has two ice cream stands, one at each end of the beach, and B locates along with A at the right endpoint. Firm A s demand at the left endpoint can be shown to be qA=2L+2tLpBpA=2L2tLpA. Where L is the length of the entire beach, t is the temperature, pA is the price charged by A and pB is the price charged by B. Given this demand on the left side of the beach, in this subgame the Nash equilibrium is for A to choose pA= A= Suppose B must sink an entry cost KB in order to enter the market and set up one stand on one endpoint of the beach. Hint: (Hint: Bertrand competition ensues at when both A and B are at the same end point of the beach.) True or False: Given that A already has one stand at each end point of the beach, and intends to stay there, firm B would choose to enter this market. True False From example 15.5, you know that if A and B only have 1 stand each, then A 's profits can be written as A=18t (b- a) (4Lab)2, where a is As position on the beach, and b is B's position on the beach. If A is located on the left endpoint of the beach and B is located on the right endpoint of the back, then a b= values into A s profit function yields A=. Since this is than the profits earned by A by setting up a stand at each of beach (with B entering), the threat to set up a stand at each end of the beach in order to deter B from entering a credible threat. Recall the Hotelling model of competition on a linear beach from Example 15.5. Suppose for simplicity that ice cream stands can locate only at the two to analyze an entry-deterring strategy involving product proliferation. Both ice cream stands have a constant marginal and average cost of zero. Consider the subgame in which firm A has two ice cream stands, one at each end of the beach, and B locates along with A at the right endpoint. Hint: Bertrand competition ensues at the right endpoint. On the right endpoint of the beach, both firms set price marginal cost and thus, both firms will earn economic profit. Continue to consider the subgame in which firm A has two ice cream stands, one at each end of the beach, and B locates along with A at the right endpoint. Firm A s demand at the left endpoint can be shown to be qA=2L+2tLpBpA=2L2tLpA. Where L is the length of the entire beach, t is the temperature, pA is the price charged by A and pB is the price charged by B. Given this demand on the left side of the beach, in this subgame the Nash equilibrium is for A to choose pA= A= Suppose B must sink an entry cost KB in order to enter the market and set up one stand on one endpoint of the beach. Hint: (Hint: Bertrand competition ensues at when both A and B are at the same end point of the beach.) True or False: Given that A already has one stand at each end point of the beach, and intends to stay there, firm B would choose to enter this market. True False From example 15.5, you know that if A and B only have 1 stand each, then A 's profits can be written as A=18t (b- a) (4Lab)2, where a is As position on the beach, and b is B's position on the beach. If A is located on the left endpoint of the beach and B is located on the right endpoint of the back, then a b= values into A s profit function yields A=. Since this is than the profits earned by A by setting up a stand at each of beach (with B entering), the threat to set up a stand at each end of the beach in order to deter B from entering a credible threat