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Transport Cost Sharing and Spatial Competition

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  • Sudipta Sarangi
  • Hrachya Kyureghian

Abstract

We consider a linear city model where both firms and consumers have to incur transport costs. Following a standard Hotelling (1929) type framework we analyze a duopoly where firms facing a continuum of consumers choose locations and prices, with the transportation rate being linear in distance. From a theoretical point of view such a model is interesting since mill pricing and uniform delivery pricing arise as special cases. Given the complex nature of the profit function for the two-stage transport cost sharing game, we invoke simplifying assumptions and solve for two different games. We provide a complete characterization for the equilibrium of the location game between the duopolists by removing the price choice from the strategy space. We then find that if the two firms are constrained to locate at the same spot, the resulting price competition leads to a mixed strategy equilibrium with discriminatory rationing. In equilibrium both firms always have positive expected profits. Finally, we derive a pure strategy equilibrium for the two-stage game. Results are then compared with the mill pricing and uniform delivery pricing models.

Suggested Citation

  • Sudipta Sarangi & Hrachya Kyureghian, 2004. "Transport Cost Sharing and Spatial Competition," Discussion Papers of DIW Berlin 406, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp406
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    References listed on IDEAS

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    More about this item

    Keywords

    Spatial competition; Cost sharing;

    JEL classification:

    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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