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Product Differentiation with Consumer Arbitrage

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  • Aguirre Pérez, Iñaki
  • Espinosa Alejos, María Paz

Abstract

We analyze the consequences of consumers behavior concerning personal arbitrage in a spatial discrimination context where firms know the consumers distribution but cannot distinguish them by location. The firms' equilibrium pricing policies provide incentives for consumers not to demand their preferred varieties of products but rather to purchase more standard varieties. This behavior may explain a decrease in observed market diversity: the demanded varieties tend to agglomerate around the center of the market. We also deal with efficiency in the presence of personal arbitrage and show that it is efficient that the cost of adapting the product to the consumers needs be shared through arbitrage, but oligopoly gives rise to an inefficient level of personal arbitrage.

Suggested Citation

  • Aguirre Pérez, Iñaki & Espinosa Alejos, María Paz, 2003. "Product Differentiation with Consumer Arbitrage," DFAEII Working Papers 1134-8984, University of the Basque Country - Department of Foundations of Economic Analysis II.
    • Handle: RePEc:ehu:dfaeii:5721
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    Cited by:

    1. Sallstrom Matthews, S.E., 2007. "The Principle of Moderate Differentiation," Cambridge Working Papers in Economics 0720, Faculty of Economics, University of Cambridge.

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