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Product Differentiation with Consumer Arbitrage

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Author Info
Iñaki Aguirre () (Departamento de Fundamentos del Análisis Económico I, Universidad del Pais Vasco, Spain)
María Paz Espinosa () (Departamento de Fundamentos del Análisis Económico II, Universidad del País Vasco, Spain)

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Abstract

We analyze the consequences of consumers behavior concerning personal arbitrage in a spatial discrimination context where firms know the consumers distribution but cannot distinguish them by location. The firms' equilibrium pricing policies provide incentives for consumers not to demand their preferred varieties of products but rather to purchase more standard varieties. This behavior may explain a decrease in observed market diversity: the demanded varieties tend to agglomerate around the center of the market. We also deal with efficiency in the presence of personal arbitrage and show that it is efficient that the cost of adapting the product to the consumers needs be shared through arbitrage, but oligopoly gives rise to an inefficient level of personal arbitrage.

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Publisher Info
Paper provided by Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) in its series BILTOKI with number 200304.

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Date of creation: 11 Mar 2003
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Handle: RePEc:ehu:biltok:200304

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Postal: Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: spatial price discrimination product differentiation personal arbitrage.

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
R32 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Other Production and Pricing Analysis

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  1. Jen-Te Yao & Fu-Chuan Lai, 2006. "Incentive consistency and the choice of a spatial pricing mode," The Annals of Regional Science, Springer, vol. 40(3), pages 583-601, August. [Downloadable!] (restricted)
  2. Hong Hwang & Yan-Shu Lin & Chao-Cheng Mai, 2007. "Spatial pricing, optimal location and social welfare with consumer arbitrage," The Annals of Regional Science, Springer, vol. 41(3), pages 619-638, September. [Downloadable!] (restricted)
  3. Sallstrom Matthews, S.E., 2007. "The Principle of Moderate Differentiation," Cambridge Working Papers in Economics 0720, Faculty of Economics, University of Cambridge. [Downloadable!]
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