Problem
The market for superpremium ice creams is dominated by Ben&Jerry's and Haagen-Dazs, which compete with non-overlapping flavors and a "chunky" vs. "smooth" concept, depending on the presence of mix-ins (mix-ins are extra ingredients like chocolate, caramel, candy, and baked goods that have been added to the ice cream). Using a unit segment to represent smoothness of the ice cream, Haagen-Dazs (A) produces perfectly smooth flavors (i.e. is located at 0), while Ben&Jerry's (B) produces perfectly chunky flavors (i.e. is located at 1).
Ice cream consumers differ in their preference for smoothness and are uniformly distributed along the segment. Each consumer has a disutility (in addition to the price) from departing from their favorite smoothness, equal to a unit transport cost of t = 2.
Both firms have the same marginal cost c = 10 and no fixed costs.
Task
a) How would you expect the level of advertising to change if entry took place in this market, as described below?
b) Imagine that entry in this market became easy and, as a consequence, many firms entered with ice creams with intermediate levels of smoothness between Ben&Jerry's and Haagen-Dazs.