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A Welfare Analysis of Location Space Constraints with Vertically Separated Sellers

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  • Youping Li

    (East China University of Science and Technology)

  • Jie Shuai

    (Zhongnan University of Economics and Law)

Abstract

This paper studies the welfare effects of location space constraints when the duopoly sellers are vertically separated. As the downstream firms respond to higher input prices by locating further away from the center of the market, constraining them to locate within the linear city allows the upstream manufacturers better to exploit the downstream industry. This leads to higher final good prices and lower consumer welfare (despite the savings on transportation). This result – which is robust to the inclusion of R&D decisions – is in sharp contrast to the case in which the sellers are vertically integrated. Also different, the incentive to invest in cost-reducing R&D is always insufficient compared with the social optimum. Our results thus suggest the importance of taking into account the vertical market structure in formulating zoning (product standard) and R&D policies.

Suggested Citation

  • Youping Li & Jie Shuai, 2018. "A Welfare Analysis of Location Space Constraints with Vertically Separated Sellers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 161-177, February.
    • Handle: RePEc:kap:revind:v:52:y:2018:i:1:d:10.1007_s11151-017-9568-x
    DOI: 10.1007/s11151-017-9568-x
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    3. Sangheon Han & Dong Joon Lee, 2020. "Additional Transportation Costs benefit Consumer Surplus and Social Welfare in a Bilateral Duopoly," Bulletin of Applied Economics, Risk Market Journals, vol. 7(2), pages 119-128.
    4. Scott M. Gilpatric & Youping Li, 2021. "Endogenous Price Leadership and Product Positioning," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(2), pages 287-302, March.

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    More about this item

    Keywords

    Location constraint; R&D; Vertical separation;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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