The Hull Petroleum Company and Inverted V are retail gasoline franchises that co

Question

The Hull Petroleum Company and Inverted V are retail gasoline franchises that compete in a local market to sell gasoline to consumers. Hull and Inverted V are located across the street from each other and can observe the prices posted on each other’s marquees. Demand for gasoline in this market is Q = 50 – 10P, and both franchises obtain gasoline from their supplier at $1.25 per gallon. On the day that both franchises opened for business, each owner was observed changing the price of gasoline advertised on its marquee more than 10 times; the owner of Hull lowered its price to slightly undercut Inverted V’s price, and the owner of Inverted V lowered its advertised price to beat Hull’s price. Since then, prices appear to have stabilized. Under current conditions, how many gallons of gasoline are sold in the market, and at what price? Would you answer differ if Hull had service attendants available to fill consumers’ tanks but Inverted V was only a self-service station? Explain.

Explanation / Answer

This is Bertrand competition. Each firm prices at marginal cost. P = MC P = $1.25 This means the total quantity supplied to the market is Q = 50 - 10*1.25 Q = 37.5 Each firm splits this: q1 = q2 = 18.75 This would change if Hull had service attendants and Inverted V didn't. This would do two things. First, it would increase the marginal cost for Hull. But it might also give the two firms heterogeneous demands. That is, Hull may be engaging in product differentiation. Hull will only survive if the new demand for hull produces a price greater than or equal to the new marginal cost. Inverted V will match that price or undercut it depending on the heterogeneity of consumer demands.

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