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Optimal monopoly market area spanning in multidimensional commodity spaces

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  • Gábor Péli

    (Faculty of Economics, University of Groningen, Groningen, The Netherlands)

  • Arjen van Witteloostuijn

    (Faculty of Applied Economics, University of Antwerpen, Antwerpen, Belgium)

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    Abstract

    A monopoly firm locates in multidimensional product characteristics' space by setting a price that maximizes its profits. The monopoly market area (MMA) it serves strikes the happy medium between lower price and larger MMA, assuming absence of price discrimination, by setting the price at the MMA margins. The MMA takes different shapes, such as hyperspheres or hypercubes, depending on how customers perceive the product distance from their ideal tastes. Commodity space dimensionality, a measure of customer taste elaboration, has a robust effect on optimization: the optimal MMA stretch increases and price decreases with dimensionality, with different customer sensitivity patterns in place. Copyright © 2008 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/mde.1428
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 30 (2009)
    Issue (Month): 1 ()
    Pages: 1-14

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    Handle: RePEc:wly:mgtdec:v:30:y:2009:i:1:p:1-14

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. Irmen, Andreas & Thisse, Jacques-François, 1996. "Competition in Multi-characteristics Spaces: Hotelling was Almost Right," CEPR Discussion Papers 1446, C.E.P.R. Discussion Papers.
    2. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
    3. Boyan Jovanovic, 2001. "Fitness and Age: Review of Carroll and Hannan's Demography of Corporations and Industries," Journal of Economic Literature, American Economic Association, vol. 39(1), pages 105-119, March.
    4. Caplin, Andrew S & Nalebuff, Barry J, 1986. "Multi-dimensional Product Differentiation and Price Competition," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 129-45, Suppl. No.
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