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FOB or Uniform Delivered Prices: Strategic Choice and Welfare Effects

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  • Zhang, Mingxia
  • Sexton, Richard J
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    Abstract

    In spatial markets firms typically use either FOB (mill) or uniform delivered (UD) pricing. What competitive factors motivate this choice and what are the welfare implications of the choice? We study these questions in a duopsony market, where farmers with unit elastic supply curves sell to processing firms. In results that differ considerably from prior work, we show that the equilibrium price policy depends upon the extent of competition in the market, with FOB pricing emerging under very competitive structures and UD pricing emerging under less competition. Mixed FOB-UD pricing may also emerge in equilibrium. In most cases welfare is higher under UD than FOB pricing. Copyright 2001 by Blackwell Publishing Ltd

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Industrial Economics.

    Volume (Year): 49 (2001)
    Issue (Month): 2 (June)
    Pages: 197-221

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    Handle: RePEc:bla:jindec:v:49:y:2001:i:2:p:197-221

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    References

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    1. ANDERSON, Simon P. & de PALMA, André & THISSE, Jacques-François, . "Social surplus and profitability under different spatial pricing policies," CORE Discussion Papers RP -1009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. THISSE, Jacques-François & VIVES, Xavier, . "On the strategic choice of spatial price policy," CORE Discussion Papers RP -793, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
    4. AM Alvarez & EG Fidalgo & RJ Sexton & M Zhang, 2000. "Oligopsony power with uniform spatial pricing: theory and application to milk processing in Spain," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 27(3), pages 347-364, September.
    5. Anderson, Simon P & de Palma, Andre & Thisse, Jacques-Francois, 1989. "Spatial Price Policies Reconsidered," Journal of Industrial Economics, Wiley Blackwell, vol. 38(1), pages 1-18, September.
    6. Aguirre, Inaki & Espinosa, Maria Paz & Macho-Stadler, Ines, 1998. "Strategic entry deterrence through spatial price discrimination," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 297-314, May.
    7. Balcer, Yves, 1983. "F.O.B. Pricing versus uniform delivered pricing: A welfare analysis in a stochastic environment," Journal of Economic Theory, Elsevier, vol. 30(1), pages 54-73, June.
    8. Schmitt, N. & Eaton, B.C., 1992. "Endogenous Pricing Modes in Markets for Inputs," Discussion Papers dp92-13, Department of Economics, Simon Fraser University.
    9. Greenhut, Melvin L, 1981. "Spatial Pricing in the United States, West Germany and Japan," Economica, London School of Economics and Political Science, vol. 48(189), pages 79-86, February.
    10. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
    11. Schuler, Richard E & Hobbs, Benjamin F, 1982. "Spatial Price Duopoly under Uniform Delivered Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 175-87, September.
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    Cited by:
    1. Gunther Maier, 2009. "Spatial prices, search behavior and location," The Annals of Regional Science, Springer, vol. 43(1), pages 27-48, March.
    2. Graubner, Marten & Balmann, Alfons, 2012. "Spatial Pricing on Land Rental Markets," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125349, Agricultural and Applied Economics Association.
    3. Kumar, Ashutosh & Saha, Bibhas, 2008. "Spatial competition in a mixed duopoly with one partially nationalized firm," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 326-341, June.

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