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Product Variety and Welfare under Discriminatory and Mill Pricing Policies

Author

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  • Norman, George
  • Thisse, Jacques-François

Abstract

We re-examine the economic justification for the regulation of firms' spatial price policies. Existing analysis, by treating market structure as exogenous, loses an important trade-off. Discriminatory pricing is more competitive between incumbents but acts as a strong deterrent against entry. 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 can price discriminate. The entry deterring effect of discriminatory pricing is dominant whatever the degree of spatial contestability or the nature of demand but welfare effects depend upon the degree of spatial contestability. The lower the degree of spatial contestability, the more effective is discriminatory pricing at limiting entry and the more likely is it that mill pricing is socially desirable.

Suggested Citation

  • Norman, George & Thisse, Jacques-François, 1994. "Product Variety and Welfare under Discriminatory and Mill Pricing Policies," CEPR Discussion Papers 972, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:972
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    Citations

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    Cited by:

    1. Blanchard, Pierre & Gaigné, Carl & Mathieu, Claude, 2012. "Trade costs and international strategy of firms: The role of endogenous product differentiation," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1023-1036.
    2. Carlos Gutiérrez-Hita & Martin Peitz, 2001. "Retailer Locations, Local Supply And Price Policies," Working Papers. Serie AD 2001-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Matsumura, Toshihiro & Okamura, Makoto, 2006. "Equilibrium number of firms and economic welfare in a spatial price discrimination model," Economics Letters, Elsevier, vol. 90(3), pages 396-401, March.

    More about this item

    Keywords

    Discriminatory Pricing; Mill Pricing; Product Variety; Regulation; Spatial Contestability;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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