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Transport Cost Sharing and Spatial Competition

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  • Sudipta Sarangi
  • Hrachya Kyureghian

Abstract

We consider a linear city model where both firms and consumers have to incur transport costs. Following a standard Hotelling (1929) type framework we analyze a duopoly where firms facing a continuum of consumers choose locations and prices, with the transportation rate being linear in distance. From a theoretical point of view such a model is interesting since mill pricing and uniform delivery pricing arise as special cases. Given the complex nature of the profit function for the two-stage transport cost sharing game, we invoke simplifying assumptions and solve for two different games. We provide a complete characterization for the equilibrium of the location game between the duopolists by removing the price choice from the strategy space. We then find that if the two firms are constrained to locate at the same spot, the resulting price competition leads to a mixed strategy equilibrium with discriminatory rationing. In equilibrium both firms always have positive expected profits. Finally, we derive a pure strategy equilibrium for the two-stage game. Results are then compared with the mill pricing and uniform delivery pricing models.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 406.

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Length: I, 27 p.
Date of creation: 2004
Date of revision:
Handle: RePEc:diw:diwwpp:dp406

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Keywords: Spatial competition; Cost sharing;

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  1. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
  2. Dos Santos Ferreira, R. & Thisse, J.-F., . "Horizontal and vertical differentiation: The Launhardt model," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1216, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. De Palma, Andre & Pedro Pontes, Jose & Thisse, Jacques-Franco, 1987. "Spatial competition under uniform delivered pricing," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 17(3), pages 441-449, August.
  4. Norman, George, 1983. "Spatial Pricing with Differentiated Products," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(2), pages 291-310, May.
  5. Graitson, Dominique, 1982. "Spatial Competition a la Hotelling: A Selective Survey," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 31(1-2), pages 13-25, September.
  6. Greenhut, John G & Greenhut, M L, 1975. "Spatial Price Discrimination, Competition and Locational Effects," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 42(168), pages 401-19, November.
  7. Allen, Beth & Hellwig, Martin, 1986. "Price-Setting Firms and the Oligopolistic Foundations of Perfect Competition," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 387-92, May.
  8. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1145-50, September.
  9. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  10. Kats, Amoz, 1995. "More on Hotelling's stability in competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 13(1), pages 89-93, March.
  11. ANDERSON, Simon P. & de PALMA, André & THISSE, Jacques-François, . "Spatial price policies reconsidered," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -838, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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