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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 15459.
Date of creation: 2009
Date of revision:
Horizontal differentiation; 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-2009-06-17 (All new papers)
- NEP-COM-2009-06-17 (Industrial Competition)
- NEP-MIC-2009-06-17 (Microeconomics)
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