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Price Discrimination and Equilibrium in Monopolistic Competition

Author

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  • MacLeod, W. B.
  • Norman, G.
  • Thisse, J.-F.

Abstract

Modern theories of monopolistic competition have borrowed extensively from techniques developed in location theory and the theory of spatial pricing: the monopolistically competitive firm is assumed to choose a "location" and price for its product. A subject that has been of increasing concern in this corpus of theory is that there exists no free-entry price-location equilibrium. In this paper we demonstrate that free-entry price-location equilibrium exists provided only that producers are allowed to price discriminate among customers in a reasonable manner. Equilibrium is modelled as a two-stage game using the Selten concept of subgame perfect Nash equilibrium. It is shown that the equilibrium discriminatory price system is one initially identified by Hoover. In addition, we show that equilibrium is not unique. The precise nature of equilibrium in a particular market will be dependent upon the history of that market.

Suggested Citation

  • MacLeod, W. B. & Norman, G. & Thisse, J.-F., 1987. "Price Discrimination and Equilibrium in Monopolistic Competition," Queen's Institute for Economic Research Discussion Papers 275211, Queen's University - Department of Economics.
    • Handle: RePEc:ags:queddp:275211
    DOI: 10.22004/ag.econ.275211
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L68 - Industrial Organization - - Industry Studies: Manufacturing - - - Appliances; Furniture; Other Consumer Durables

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