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Firm entry, product repositioning and welfare

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Author Info
Eleftherios Zacharias

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Abstract

We 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.

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Publisher Info
Paper provided by Economics and Econometrics Research Institute (EERI) in its series EERI Research Paper Series with number EERI_RP_2009_17.

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Length: 15 pages
Date of creation: 08 2009
Date of revision:
Handle: RePEc:eei:rpaper:eeri_rp_2009_17

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Related research
Keywords: Horizontal di¤erentiation; welfare analysis; product repositioning.;

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Find related papers by JEL classification:
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

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References listed on IDEAS
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.:
  1. Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, 07. [Downloadable!] (restricted)
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  2. Wen Zhou, 2006. "A Simple Model of Entry That Increases Price Levels and Price Dispersion," Advances in Economic Analysis & Policy, Berkeley Electronic Press, vol. 6(1), pages 1647-1647. [Downloadable!] (restricted)
  3. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058. [Downloadable!] (restricted)
  4. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law & Economics, University of Chicago Press, vol. 35(2), pages 331-50, October.
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. Simon Cowan & Xiangkang Yin, 2008. "Competition Can Harm Consumers ," Australian Economic Papers, Blackwell Publishing, vol. 47(3), pages 264-271, 09. [Downloadable!] (restricted)
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This page was last updated on 2009-11-4.

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