Product Variety and Welfare under Tough and Soft Pricing Regimes
We re-examine the economic justification for the regulation of firms' price policies. Existing analysis of the relative benefits of alternative pricing policies, by treating market structure as exogenous, loses an important trade-off. Price deregulation leading to, for example, discriminatory pricing, on the one hand, enhances competition between incumbents but, on the other, acts as a strong deterrent against entry. We illustrate this trade-off by analysing the familiar address model of product differentiation and show that product variety is determined by the degree of spatial contestability of the market (the ability of entrants to make binding location commitments) and by whether firms are free to price discriminate. Copyright 1996 by Royal Economic Society.
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Volume (Year): 106 (1996)
Issue (Month): 434 (January)
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