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Firm entry, product repositioning and welfare

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  • Zacharias, Eleftherios

Abstract

We show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer's surplus possibly decrease. We first derive the price and the consumer's surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer's surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 49 (2009)
Issue (Month): 4 (November)
Pages: 1225-1235

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Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1225-1235

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Web page: http://www.elsevier.com/locate/inca/620167

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Keywords: Horizontal differentiation Welfare analysis Product repositioning;

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References

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  1. Norbert Schulz & Konrad Stahl, 1996. "Do Consumers Search for the Highest Price? Oligopoly Equilibrium and Monopoly Optimum in Differentiated Products Markets," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 542-562, Autumn.
  2. Zhou Wen, 2006. "A Simple Model of Entry That Increases Price Levels and Price Dispersion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-14, December.
  3. Michael B. Ward & Jay P. Shimshack & Jeffrey M. Perloff & J. Michael Harris, 2002. "Effects of the Private-Label Invasion in Food Industries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 84(4), pages 961-973.
  4. Raphael Thomadsen, 2007. "Product Positioning and Competition: The Role of Location in the Fast Food Industry," Marketing Science, INFORMS, INFORMS, vol. 26(6), pages 792-804, 11-12.
  5. Alessandra Chirco & Luca Lambertini & Fabio Zagonari, 2003. "How demand affects optimal prices and product differentiation," Papers in Regional Science, Springer, Springer, vol. 82(4), pages 555-568, November.
  6. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  7. Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers 04-04, NET Institute, revised Dec 2004.
  8. Michael H. Riordan & Yongmin Chen, 2005. "Price and Variety in the Spokes Model," Discussion Papers, Columbia University, Department of Economics 0405-20, Columbia University, Department of Economics.
  9. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 331-50, October.
  10. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, Econometric Society, vol. 48(6), pages 1575-79, September.
  11. Hinloopen, Jeroen & van Marrewijk, Charles, 1999. "On the limits and possibilities of the principle of minimum differentiation1," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 735-750, July.
  12. Simon Cowan & Xiangkang Yin, 2008. "Competition Can Harm Consumers ," Australian Economic Papers, Wiley Blackwell, vol. 47(3), pages 264-271, 09.
  13. repec:cdl:agrebk:5326 is not listed on IDEAS
  14. Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(5), pages 1041-61, October.
  15. Andrew Sweeting, 2007. "Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry," NBER Working Papers 13522, National Bureau of Economic Research, Inc.
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Cited by:
  1. Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.

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