Suppose Two Small-Town Video Stores, Store a and Store B

question 160

Essay

Suppose two small-town video stores, store A and store B, compete. The two stores collude and agree to share the market equally. If neither store cheats on the agreement, each store will make $2,500 a day in economic profits. If only one store cheats, the cheater will increase its economic profits to $4,000 and the store that abides by the agreement will incur an economic loss of $1,000. If both firms cheat, they both will earn zero economic profits. Neither store has any way of policing the actions of the other.

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Definitions:

Patronage

The support or regular business given to a store, hotel, or other service provider by customers.

Behavioral Segmentation

The process of dividing a market into groups based on consumer knowledge, attitudes, uses, or responses to a product.

MicroFridge

A compact combination of a refrigerator and microwave oven, typically used in small living spaces such as dormitory rooms.

Late-Night Snack

A small portion of food typically consumed after the usual dinner time, often late in the evening or at night.