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Price regulation in a spatial duopoly with possible non-buyers

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  • Jeroen Hinloopen

    ()
    (University of Amsterdam, Faculty of Economics and Econometrics, Department of Economics, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands , and Tinbergen Institute and Delft University of Technology)

Abstract

If the price is regulated in a spatial duopoly where consumers have a finite upper bound as to the price they are willing to pay for the differentiated product, in most cases the Principle of Minimum Differentiation does not apply. Depending on the market structure firms either (i) form local monopolies, or (ii) differentiate intermediately, or (iii) agglomerate at the market centre. Minimum differentiation is never total-surplus-maximizing nor desired by firms. In most cases the regulator sets a price below that maximizing industry profits. For a substantial range of market configurations the regulated (first-best) price exceeds marginal cost. This induces firms to serve a larger part of the market.

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Bibliographic Info

Article provided by Springer in its journal The Annals of Regional Science.

Volume (Year): 36 (2002)
Issue (Month): 1 ()
Pages: 19-39

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Handle: RePEc:spr:anresc:v:36:y:2002:i:1:p:19-39

Note: Received: February 1999/Accepted: September 2001
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Cited by:
  1. Sallstrom Matthews, S.E., 2007. "The Principle of Moderate Differentiation," Cambridge Working Papers in Economics 0720, Faculty of Economics, University of Cambridge.
  2. Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2002. "Quality and location choices under price regulation," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-28, Social Science Research Center Berlin (WZB).
  3. Jeroen Hinloopen & Stephen Martin, 2013. "Costly Location in Hotelling Duopoly," Tinbergen Institute Discussion Papers 13-101/VII, Tinbergen Institute.

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