Suppose that three grocery stores sell Bubba's Gourmet Red Beans and Rice. Bullseye market is able to acquire, stock, and market them for $2.00 per package. OKMart can acquire, stock, and market them for $1.98 per package. SamsMart can acquire, stock, and market them for $1.96 per package.
a. If the three competitors are located in close proximity to one another, so that the cost of going to a different store to purchase red beans and rice is negligible, and if the market for prepackaged gourmet red beans and rice is characterized by Bertrand competition, what will the prevailing market price be?
b. Where will customers buy their red beans and rice? Bullseye, OKMart, or SamsMart? What does your answer suggest about the potential rewards to small improvements in efficiency via cost-cutting?
c. Suppose that each day, equal numbers of customers begin their shopping at each of the three stores. If the cost of going to a different store to purchase red beans and rice is 2 cents, is the Bertrand result likely to hold in this case? Where will customers purchase red beans and rice? Where will they not purchase them?