Assume that there are two hair salons located on Main Street which is 1 mile in length….

Assume that there are two hair salons located on Main Street which is 1 mile in length. Salon

A which is located at the east end of the Main Street has a constant unit cost of $5and Salon

B which is located at the west end of the Main Street has a constant unit cost of $10. There

are 1000 potential customers who live along the street and they are uniformly spread out

along the street. Customers are willing to pay $40 for a hair-cut that is done at their home. If

a customer has to travel to get a hair-cut, then a there and back travel cost of $5 per mile is

incurred. Suppose that each salon wants to set a price for a hair-cut that maximizes salon’s

profit.

a- Salon A and Salon B choose their prices sequentially. Suppose Salon A chooses its price

first. What are the equilibrium prices and profits? Do these two salons serve all

customers?

b- Salon A and Salon B choose their prices sequentially. Suppose Salon B chooses its price

first. What are the equilibrium prices and profits? Do these two salons serve all

customers?

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