4 coffee shops with identical products display and costs compete to find a suitable location for...

4 coffee shops with identical products display and costs compete to find a suitable location for their stalls, at the entrance of an airport. The airport stretches linearly for 120 kms, and there are 4 gates along this stretch, each located at equal intervals. The first two gates are for departure, and the last two are for arrival. According to an observation it is noticed that only passengers at the arrival gates can afford time to sip on a cup of coffee leisurely at the gate.

i. Find out the firms' optimal decision to locate their stalls along this gateway.

ii. Find out equilibrium number of stalls and their locations.

Expert Solution

4 coffee shops with identical products displayed and costs compete for a suitable locations.

The airport stretches 120 kms, there are 4 gates, so at each 30 (120/4) kms a gate is located.

Only the arrival gate is convenient for a leisurely coffee experience.

1. Firms optimal decision would be to locate their stalls at the arrival gateway, as it is evident that the departure gates don't attract much revenue. So they would keep the majority of the shops in the arrival department and minimum at the departure terminal as they don't want to miss out an opportunity and higher demand. This is better than keeping most at the departure gates.

ii. Equilibrium is defined as when market supply and demand balance each other out. To take advantage of the arrival gates the equilibrium number could be 3 shops at the arrival gate at equal distances so that one sees there is rush at two places, for higher demand one can go to the third one. If there are only two shops at the arrival gate, this would lead to increase in product prices because of higher demand, which could lead to disequilibrium. One shop has to be near the departure gate as reduced flow has to be maintained by at least one shop.

Rahul Sunny answered 7 months ago

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