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How demand affects optimal prices and product differentiation**We thank the editor in chief and three anonymous referees for very helpful comments. The usual disclaimer applies

Author

Listed:
  • Chirco, Alessandra
  • Lambertini, Luca
  • Zagonari, Fabio

Abstract

We investigate the bearings of the level of demand on firms' optimal locations and prices in a linear model of spatial differentiation with quadratic disutility of transportation. We show that demand affects both optimal prices and optimal locations of firms, in that firms increase product differentiation only if demand is high enough to trigger a price war. Otherwise, the non cooperative duopoly equilibrium is observationally equivalent to the monopoly optimum with the same number of products. Contrary to the linear transportation cost case, optimal prices are everywhere increasing in the reservation price.

Suggested Citation

Handle: RePEc:eee:paresc:v:82:y:2003:i:4:p:555-568
DOI: 10.1007/s10110-003-0173-z
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File URL: http://www.sciencedirect.com/science/article/pii/S105681902301638X
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Keywords

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JEL classification:

  • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
  • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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