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The Effects of Price Restrictions on Competition Between National and Local Firms

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  • Patrick J. DeGraba
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    Abstract

    I present a game-theoretic model of competition between a national firm and local firms in which the introduction of most-favored-customer clauses into the sales contracts of the national firm decreases all industry prices. The reason is that the price restriction makes the national firm a weak price competitor in each local market. This produces a prisoners' dilemma situation in which each local firm has the unilateral incentive to be more aggressive in nonprice decisions. This increase in nonprice competition by all local firms causes prices to fall across the industry.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 18 (1987)
    Issue (Month): 3 (Autumn)
    Pages: 333-347

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    Handle: RePEc:rje:randje:v:18:y:1987:i:autumn:p:333-347

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    Cited by:
    1. Ralph Braid, 2013. "The locations of firms on intersecting roadways," The Annals of Regional Science, Springer, Springer, vol. 50(3), pages 791-808, June.
    2. Roman Inderst & Tommaso Valletti, 2006. "Price Discrimination in Input Markets," CEIS Research Paper, Tor Vergata University, CEIS 73, Tor Vergata University, CEIS.

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