Consider Hotelling's model (a street of length one, consumers uniformly distributed along the street, each consumer has a transportation cost equal to 2t, where t is the distance traveled). Suppose there are two gas stations, one located at 1/4 and the other located at 1. (a) Calculate the demand functions for the two firms. (b) If the two gas stations compete in prices and settle at a Nash equilibrium, will they charge the same price for gasoline? (assume that production costs are zero, that is, firms maximize revenue).
Consider Hotelling's model (a street of length one, consumers uniformly distributed along the street, each consumer has a transportation cost equal to 2t, where t is the distance traveled). Suppose there are two gas stations, one located at 1/4 and the other located at 1. (a) Calculate the demand functions for the two firms. (b) If the two gas stations compete in prices and settle at a Nash equilibrium, will they charge the same price for gasoline? (assume that production costs are zero, that is, firms maximize revenue).
Chapter8: Game Theory
Section: Chapter Questions
Problem 8.4P
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Consider Hotelling's model (a street of length one, consumers uniformly distributed along the street, each consumer has a transportation cost equal to 2t, where t is the distance traveled). Suppose there are two gas stations, one located at 1/4 and the other located at 1. (a) Calculate the demand functions for the two firms. (b) If the two gas stations compete in prices and settle at a Nash equilibrium, will they charge the same price for gasoline? (assume that production costs are zero, that is, firms maximize revenue).
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