The 'Innovator's Dilemma" In a Hotelling Framework - Economics Assignment Help
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This question examines the 'innovator's dilemma" in a Hotelling framework. Finns A and B compete in a differentiated products market described by the Hotelling line between 0 and 1. with symmetric utilities. linear transportation costs and 0 marginal casts. Firm A is an incumbent and offers product "0" at location 0. Firm B is a potential entrant who can develop a new product "1" at location 1. The funs simultaneously set prices po and pi for their products, and every consumer buys at most one product. A consumer located at some point .r in [0.11 gets utility from buying product 0 or 1 as follows:
Uo(x; po) = u — po — t • x Ut(x; pi) = u — — t • (1 —
where po and pi are the prices set by firm A and firm B (if it does enter the market) for products 0 and 1.
(a) Suppose firm B develops the new product 1 and enters the market. Find the equilibrium prices and profits for firms A and B offering products 0 and 1, respectively. (b) Now suppose that firm B does not exist, and firm A is a monopolist with product 0 at location 0. What is the optimal price and profit for firm A? (c) Now suppose finn A can itself develop the new product at location 1 and then sell both products at 0 and at 1. Assume firm A wants to cover the whole market and charge the same price for both products,
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