The market for superpremium ice creams is dominated by Ben&Jerry's and Haagen-Dazs, which

compete with non-overlapping flavors and a "chunky" vs. "smooth" concept, depending on the

presence of mix-ins (mix-ins are extra ingredients like chocolate, caramel, candy, and baked goods

that have been added to the ice cream). Using a unit segment to represent smoothness of the ice

cream, Haagen-Dazs (A) produces perfectly smooth flavors (i.e. is located at 0), while Ben&Jerry's

(B) produces perfectly chunky flavors (i.e. is located at 1).

Ice cream consumers differ in their preference for smoothness and are uniformly distributed along

the segment. Each consumer has a disutility (in addition to the price) from departing from their

favorite smoothness, equal to a unit transport cost of t = 2.

Both firms have the same marginal cost c = 10 and no fixed costs.

Q: Knowing that price competition is very fierce in this market, is firms' choices of maximum

differentiation optimal? Discuss.