Firm entry, product repositioning and welfare
AbstractWe show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer's surplus possibly decrease. We first derive the price and the consumer's surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer's surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2009_17.
Length: 15 pages
Date of creation: 08 2009
Date of revision:
Horizontal di¤erentiation; welfare analysis; product repositioning.;
Other versions of this item:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D60 - Microeconomics - - Welfare Economics - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-30 (All new papers)
- NEP-COM-2009-08-30 (Industrial Competition)
- NEP-IND-2009-08-30 (Industrial Organization)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael B. Ward & Jay P. Shimshack & Jeffrey M. Perloff & J. Michael Harris, 2002.
"Effects of the Private-Label Invasion in Food Industries,"
American Journal of Agricultural Economics,
Agricultural and Applied Economics Association, vol. 84(4), pages 961-973.
- Ward, Michael B. & Shimshack, Jay P. & Perloff, Jeffrey M. & Harris, J. Michael, 2002. "Effects of the private-label invasion in food industries," MPRA Paper 22186, University Library of Munich, Germany.
- Raphael Thomadsen, 2007. "Product Positioning and Competition: The Role of Location in the Fast Food Industry," Marketing Science, INFORMS, vol. 26(6), pages 792-804, 11-12.
- repec:cdl:agrebk:5326 is not listed on IDEAS
- Alessandra Chirco & Luca Lambertini & Fabio Zagonari, 2003.
"How demand affects optimal prices and product differentiation,"
Economics of Governance,
Springer, vol. 82(4), pages 555-568, November.
- Alessandra Chirco & Luca Lambertini & Fabio Zagonari, 2003. "How demand affects optimal prices and product differentiation," Papers in Regional Science, Springer, vol. 82(4), pages 555-568, November.
- Zhou Wen, 2006. "A Simple Model of Entry That Increases Price Levels and Price Dispersion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-14, December.
- Simon Cowan & Xiangkang Yin, 2008. "Competition Can Harm Consumers ," Australian Economic Papers, Wiley Blackwell, vol. 47(3), pages 264-271, 09.
- Andrew Sweeting, 2007. "Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry," NBER Working Papers 13522, National Bureau of Economic Research, Inc.
- Michael H. Riordan & Yongmin Chen, 2005.
"Price and Variety in the Spokes Model,"
0405-20, Columbia University, Department of Economics.
- Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
- Austan Goolsbee & Chad Syverson, 2008.
"How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines,"
The Quarterly Journal of Economics,
MIT Press, vol. 123(4), pages 1611-1633, November.
- Austan Goolsbee & Chad Syverson, 2005. "How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," NBER Working Papers 11072, National Bureau of Economic Research, Inc.
- Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers 04-04, NET Institute, revised Dec 2004.
- Hinloopen, Jeroen & van Marrewijk, Charles, 1999. "On the limits and possibilities of the principle of minimum differentiation1," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 735-750, July.
- Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 331-50, October.
- Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
- Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julia van Hove).
If references are entirely missing, you can add them using this form.