Let the inverse demand curve be p(q) = a − bq. Suppose there are two firms, with constant marginal cost equal to C.
Let the two firms be located at 0 and 1 on the unit interval. There are n consumers located uniformly along the interval, each with a reservation value of V . They incur transportation costs of t per unit of distance traveled from their location to the a store.
(a) What are the equilibrium strategies of the two firms under the assumption the entire market is served.
(b) What is the equilibrium outcome?
(c) In the space of (p1, p2), draw the best-response curves of the two firms. Are prices strategic complements or strategic substitutes?