Consider a Salop circle model. There are a unit mass of consumers
uniformly spread along the circumference of a circle with length 1. The consumer gets a utility of consumption equal to U(t, T) 2 21t where t is the product purchased and tis the customer's most preferred product. Each customer has an outside option of buying from none of the firms and consuming a substitute instead for a total surplus (utility minus cost) of 1. There is a fixed cost of entering the industry equal to 25.
a. (10 points) How many firms choose to enter the industry? Where do they locate? What price do they charge?
b. (10 points) Would social welfare be improved if there were more or fewer firms? Find the optimal number of firms from a social welfare perspective.
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