Consider two product designers compete where to place their product in the product space. Assume the product space is the interval from 0 to 1, including the end points. The prices of the product are fixed. Product designers place their product simultaneously in the product space. Consumer’s ideal product is spread out uniformly over the product space. Consumers like to choose their ideal product. If they cannot get their ideal product, they incur a disutility that depends linearly on the distance from their ideal product. (The disutility only depends linearly on the distance from their ideal product.) Each consumer has enough income to buy one product even if the distance from their own ideal product is 1. a. Where will the two products be placed in the Nash equilibrium if the locations of the product in the product space are chosen simultaneously? Explain.
Consider two product designers compete where to place their product in the product space. Assume the product space is the interval from 0 to 1, including the end points. The prices of the product are fixed. Product designers place their product simultaneously in the product space. Consumer’s ideal product is spread out uniformly over the product space. Consumers like to choose their ideal product. If they cannot get their ideal product, they incur a disutility that depends linearly on the distance from their ideal product. (The disutility only depends linearly on the distance from their ideal product.) Each consumer has enough income to buy one product even if the distance from their own ideal product is 1.
a. Where will the two products be placed in the Nash equilibrium if the locations of the product in the product space are chosen simultaneously? Explain.
b. What are the socially optimal locations, i.e. the best locations from society’s point of view that minimise transportation
cost? Are the locatio
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