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On the strategic choice of spatial price policy: the role of the pricing game rules

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  • Aguirre Pérez, Iñaki
  • Martín Arroyuelos, Ana María

Abstract

In this paper, whe show that the strategic choice of spatial price policy under duopoly crucially depends on the rules of price competition. Thisse and Vives (1988) show that spatial price discrimination is a dominant strategy when the mill pricing firm is the leader and the discriminatory firm is the follower. When the leader-follower roles are reversed we find that equilibrium pricing policies depend on the consumer's reservation value. The pricing policy game has two equilibria in pure strategies, either both firms price uniformly (f.o.b.) or both firms price discriminate, when the reservation value is low. For intermediate levels of the reservation value, price discrimination is a dominant strategy and the pricing policy game is similar to a Prisoner's Dilemma. When the consumer reservation value is large enough we obtain asymmetric equilibria in which one firm prices according to f.o.b. and the other price discriminates. We also analyze the case of simultaneous price competition and find a mixed strategies equilibrium for the price competition subgame such that the pricing policy game has two equilibria in pure strategies, either both firms price uniformly or both firms price discriminate.

Suggested Citation

  • Aguirre Pérez, Iñaki & Martín Arroyuelos, Ana María, 2001. "On the strategic choice of spatial price policy: the role of the pricing game rules," BILTOKI 1134-8984, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    • Handle: RePEc:ehu:biltok:5767
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    References listed on IDEAS

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    1. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-137, March.
    2. Eber, Nicolas, 1997. "A note on the strategic choice of spatial price discrimination," Economics Letters, Elsevier, vol. 55(3), pages 419-423, September.
    3. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-640, May.
    4. Edward C. Prescott & Michael Visscher, 1977. "Sequential Location among Firms with Foresight," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 378-393, Autumn.
    5. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 1-26.
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    Cited by:

    1. Torbenko, A., 2015. "Linear City Models: Overview and Typology," Journal of the New Economic Association, New Economic Association, vol. 25(1), pages 12-38.
    2. Aguirre, Inaki & Paz Espinosa, Maria, 2004. "Product differentiation with consumer arbitrage," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 219-239, February.
    3. Jen-Te Yao, 2019. "The impact of transportation asymmetry on the choice of a spatial price policy," Asia-Pacific Journal of Regional Science, Springer, vol. 3(3), pages 793-811, October.

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    More about this item

    Keywords

    spatial price discrimination; price policy;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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