Shell and Mobile, due to a turbulence in gasoline prices, must come up with new pricing strategies to stay competitive. For simplicity, let’s assume that both firms can choose between
setting the price at $3/gallon OR $2/gallon. They set their prices at the same time. Because
most Shell and Mobile stations, for some reason, are always next to one another, whoever sets
the lower price will get ALL the customers. If they set the same price the split the customers in
half. Suppose the market demand for a small town, Economiville is given by
P = 6 – 2Q
Where Q is measured by millions of gallons, and consumers in Economiville only have access to
Shell or Mobile. Shell and Mobile have no costs of producing the gas (assume they have a prior
contract with OPEC (organization of petroleum exporting countries) and have already paid for
the gas in stock). This allows us to consider them maximizing their revenue.