Product Location Decisions in a Duopoly Market: A Case Study of LC Burgers and LC Mac, Ejercicios de Microeconomía

¡Descarga Product Location Decisions in a Duopoly Market: A Case Study of LC Burgers and LC Mac y más Ejercicios en PDF de Microeconomía solo en Docsity! Paper: George, L. and J. Waldfogel ‘Who Affects Whom in Daily Newspaper Markets’, Journal of Political Economy (2003) 111(4), pp.765–784 Exercise: LC Burgers is currently the only fast-food chain in Linear City, a city that consists of a street one mile long, with one thousand consumers distributed uniformly along the street. The price for the Big LC, the only product sold by the LC Burger chain, is set nationally at $4, so that the local Linear City manager's decision is limited to choosing the number and location of its stores. Each store costs $600,000 to open and lasts indefinitely. Each consumer buys one burger per week at the current price of $4. However, no consumer will walk for more than a quarter of a mile to buy a burger. Operating costs are $1 per burger. The interest rate is 0.1% per week. The market conditions are unchanging, so present discounted profits can be regarded as level perpetuities. (In other words, present discounted profits are equal to weekly profits divided by the weekly interest rate.) (a) Suppose that LC Burgers faces no competition and no threat of entry. How many stores should LC Burgers open, and at which locations? (7 marks) LC Mac is contemplating entering Linear City. LC Mac's costs and price are the same as those of LC Burgers. Moreover, consumers regard the products at the two chains as equally good, so, if both brands are in town, each consumer buys from the closest store. (b) At what locations should LC Mac open stores, given that LC Burgers has opened the locations found to be optimal in part (a)? (8 marks) (c) Recognizing the threat of future entry by LC Mac, at what locations should LC Burgers open stores? (10 marks) (d) How would your analysis of these product location decisions be affected if you also considered the possibility of pricing competition, i.e., if prices were set independently given the locations of the stores (rather than being taken as fixed, as was done before)? (8 marks) (a) With two stores, one at 0.25 and the other at 0.75 (miles from the left end of the street), LC Burgers is able to cover the entire market. Any additional store would not increase demand and would thus be suboptimal. By opening two stores, LC Burgers makes a discounted profit of 1,000(4 – 1)/0.1% – 2 x 600,000 = $1,800,000. If LC Burgers were to open one store only, the maximum it could possibly get is 500(4 – 1)/0.1% – 600,000 = $900,000. (b) LC Mac should open four stores, to the immediate left and right of LC Burger’s stores, thus stealing all of the market demand. Given these locations, LC Mac would receive a demand of