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Firm entry, product repositioning and welfare

  • Zacharias, Eleftherios

We 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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Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 49 (2009)
Issue (Month): 4 (November)
Pages: 1225-1235

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Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1225-1235
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  1. Alessandra Chirco & Luca Lambertini & Fabio Zagonari, 2003. "How demand affects optimal prices and product differentiation," Papers in Regional Science, Springer, vol. 82(4), pages 555-568, November.
  2. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1611-1633.
  3. Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1041-61, October.
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  6. repec:cdl:agrebk:5326 is not listed on IDEAS
  7. Norbert Schulz & Konrad Stahl, 1996. "Do Consumers Search for the Highest Price? Oligopoly Equilibrium and Monopoly Optimum in Differentiated Products Markets," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 542-562, Autumn.
  8. Hinloopen, Jeroen & van Marrewijk, Charles, 1999. "On the limits and possibilities of the principle of minimum differentiation1," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 735-750, July.
  9. Simon Cowan & Xiangkang Yin, 2008. "Competition Can Harm Consumers ," Australian Economic Papers, Wiley Blackwell, vol. 47(3), pages 264-271, 09.
  10. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  11. Raphael Thomadsen, 2007. "Product Positioning and Competition: The Role of Location in the Fast Food Industry," Marketing Science, INFORMS, vol. 26(6), pages 792-804, 11-12.
  12. Ward, Michael B. & Shimshack, Jay P. & Perloff, Jeffrey M. & Harris, J. Michael, 2002. "Effects of the private-label invasion in food industries," MPRA Paper 22186, University Library of Munich, Germany.
  13. Zhou Wen, 2006. "A Simple Model of Entry That Increases Price Levels and Price Dispersion," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-14, December.
  14. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
  15. Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, 07.
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