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Price Responses to Market Entry With and Without Endogenous Product Choice

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  • Helge Sanner

Abstract

Textbook wisdom says that competition yields lower prices and higher consumer surplus than monopoly. We show in two versions of a simple location-product differentiation model with and without endogenous choice of products that these two results have to be qualified. In both models, more than half of the reasonable parameter values lead to higher prices with duopoly than with monopoly. If the product characteristics are exogenous to the firms, consumers may even be be better off with monopoly in average.

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Bibliographic Info

Paper provided by Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät in its series Volkswirtschaftliche Diskussionsbeiträge with number 81.

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Date of creation: Nov 2005
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Handle: RePEc:pot:vwldis:81

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Related research

Keywords: Product differentiation; Hotelling; Price and Welfare Effects of Market Entry;

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References

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  1. Keir G. Armstrong, 2004. "A Graphical Depiction of Hicksian Partial-Equilibrium Welfare Analysis," Carleton Economic Papers 04-09, Carleton University, Department of Economics.
  2. Anderson, S., 1986. "Equilibrium existence in the circle of product differentiation," CORE Discussion Papers 1986006, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
  4. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
  5. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  6. Perloff, Jeffrey M. & Suslow, Valerie Y. & Seguin, Paul J., 1995. "Higher Prices from Entry: Pricing of Brand-Name Drugs," Competition Policy Center, Working Paper Series qt75g4k1nt, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  7. Eaton, B Curtis & Lipsey, Richard G, 1978. "Freedom of Entry and the Existence of Pure Profit," Economic Journal, Royal Economic Society, vol. 88(351), pages 455-69, September.
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Cited by:
  1. Albrecht Kauffmann, 2007. "Transport Costs and the Size of Cities : the Case of Russia," Volkswirtschaftliche Diskussionsbeiträge 93, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
  2. Klaus Schöler, 2007. "Gibt es eine optimale Stadtgröße?," Volkswirtschaftliche Diskussionsbeiträge 89, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
  3. Roessler, Christian, 2012. "A limit to price-increasing competition," Journal of Mathematical Economics, Elsevier, vol. 48(2), pages 65-76.

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