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→Addendum
After consulting Ernesto about this answer the following corrections should be made:
*The battery life extension (from 4hr to 6hr) was supposed to be a vertical differentiation question. The application of a horizontal model would be wrong. There was ordering of quality.
*The Red/White problem should have assumed that the innovator made their phone red (i.e. did not keep white).
**It is not clear that given the option to keep white would be exercised even if there where economies to scope. The economies would have to be sufficiently large to overcome the problem of competiting with yourself!
*The horizontal model should have used Hotelling for prices and profits, and the Salop for entry - Salop exists to study entry in Hotelling models.
*The final part could also have been argued using a horizontal differentiation model
**Differences in quality (or seperation in distance) would lead to positive profits and prices above marginal cost.
**Differentiation may improve social welfare as in Dixit-Stiglitz where customers have a taste for variety.
**Anti-trust with a duopoly would require collusion of some sort.
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