Q3 Hotelling Model with Non Uniform Distribution

a Foraconsumer Uxo V Po o5
V R o5t ux
For amarginal consumer Uxo Ux
V Po 0.5t V P 0.5t
Po P
Thismeansthat consumers are indifferentbetween firmo andfirmI onlywhenthefirmsofferthe same price
Ifonefirmoffers a lowerpricethenall consumers willbuy at thisfrom leaving otherfirm withhigherprice oconsumersand0profits
Therefore thisisbydefinition a Bertrand PricingGame
Bythe Theorem theonlyNashEquilibrium ofthePureBertrandPricingGame is P P MC
we knowthat thepure strategyNash Equilibrium is Po P C
Profit foreachfirm is 0

b Consumer's
utility Uxo V Po oat
Ux V Po oft
Fora marginal consumer Ux Ux
V Po o at V P oSt
Po p o bt
Thismeansthat consumersareindifferentbetweenthetwofirmsonlywhenthepricedifference Po P is abt
If Po P OGt sayPo P c thenconsumerswillstrictlypreferfirmo leavingfirm I noconsumersand 0 profit
If Po P 0.64 sayPoCttPic thenconsumerswillallbuyfromfirmI leavingfirmonoconsumersand 0 profit
Asthefirmsarestill competeon prices andfirmonowhastheadvantage
firmIcannot
loweritsprice settingPi c but
afar allconsumersbysettingPoveryclosetobutlesschance
Pocanattract
Therefore thepurestrategyNashEquilibrium is Po cto.be P c
Inthiscase to N Po c
ofne
tu o

c I donotfullyunderstandwhatwillhappeninthisscenario Belowaremythoughtprocessandallofmythoughtsonthisproblem
First I triedtowritetheutility profitfunctionsandfindouttheanswer through calculation
ForN consumers Uxo V Po ost
ax V P o 5t
marginal consumer Uxo ax
Po P
Bertrand
Pricing Competition
ForNs consumers UxoV Po at
Ux V Pi CIx t
marginal consumer Uxo Ux
Pi
Xm pop I Iott
P Iit N t
Because
of symmetricequilibrium at the equilibrium firmo willget 4 consumers

pot p firmoandfirm1 equallygethalf

ofN intheBertrandPricingGame
Therefore
for firmo my two Itt NatE Po c

Foc 39 It tna t I o
Na Prattn
Pcp It List
 Similarly forfirm 1 it willget I É Nat I consumers

forfirm 1
Therefore
my tu sit n 5 pi c
t
Foc 37 je Nat I O
P spot Poyet ang t
Combiningthebestresponsefunctionsoffirm I andfirmo
t
Po t t 40 t an t t In's t
IPO I
at t Ind t
Pot ctt t mt
p Pitot In t ct t t T's t
Therefore intheequilibrium Pot p c t t t Mi t

HOWEVER this doesnotmake intuitive sense because when N o thegame is thesame as the
Bertrandgame in a soweshould see both PoandP go to c as a o
But Po P ett that both go to infinity as Na o

I don'tunderstand whytheresult from formal calculationis wrong butbelowaremyguesses

thepart I in theprofitfunction iswrong
Wecannotwrite too EttNat M Po c becauseinthiswayweassumefirmo willgethalfofN consumersnomatterwhatPo
This is amoreexplicit if wedothesamethingin 03cat Weknowwecan stillassumesymmetricequilibriumPot P astheNEisPoP
However
if wewrite to I Poc thefirstorderconditionwillthentellus N o whichdoesnotmakeanysense

Thoughtheproblem is found I stillhaveno ideahowto derive NE throughrigorousmath

So I usedintuition
When Na b or N o themodelcanbeviewed as a classichotellingmodel andtheresultshould bePo P c
When No 0 or N is themodel canbeviewedas apure PricingGame and
Bertrand theresultshouldbePo P C
Therefore theequilibrium prices should
be or in asimilarformasof p p c te nthis t
Thisrequires theprofitfunctionoffirmo tobe too PiIttNs actinsNi Po c
Nowtheprofitfunctionitself doesnotmakesensetome because it seemsthat addingthose N consumersmakesfirmo
attractlessconsumersthanwithout N consumers

I stillthink Po p att wit'm t makes intuitivesense butdon'tknow how to derive it andI'mstuckhere

WhenNa isie is nearlythesameas a classichotellingmodel Na is solarge thatfirmswouldnotbothercompetingforNi

Theequilibriumprices in thiscasewouldbe approaching ett as Na is
Po P andboth att

When Na 0 it isnearlythesameas03 a pureBertrandPricingGame

Therearetoofewconsumersuniformlydistributedontheline thatwecanbasicallyassume only Ni consumers at 0.5 inthemarket
Inthiscase theequilibriumprices wouldbeapproaching c asNs o
Po P andboth C