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Price Responses to Market Entry With and Without Endogenous Product Choice

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  • Helge Sanner

Abstract

Textbook wisdom says that competition yields lower prices and higher consumer surplus than monopoly. We show in two versions of a simple location-product differentiation model with and without endogenous choice of products that these two results have to be qualified. In both models, more than half of the reasonable parameter values lead to higher prices with duopoly than with monopoly. If the product characteristics are exogenous to the firms, consumers may even be be better off with monopoly in average.

Suggested Citation

  • Helge Sanner, 2005. "Price Responses to Market Entry With and Without Endogenous Product Choice," Volkswirtschaftliche Diskussionsbeiträge 81, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
    • Handle: RePEc:pot:vwldis:81
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    References listed on IDEAS

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    1. Chipman, John S & Moore, James C, 1980. "Compensating Variation, Consumer's Surplus, and Welfare," American Economic Review, American Economic Association, vol. 70(5), pages 933-949, December.
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    7. Eaton, B Curtis & Lipsey, Richard G, 1978. "Freedom of Entry and the Existence of Pure Profit," Economic Journal, Royal Economic Society, vol. 88(351), pages 455-469, September.
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    9. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
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    Cited by:

    1. Albrecht Kauffmann, 2007. "Transport Costs and the Size of Cities : the Case of Russia," Volkswirtschaftliche Diskussionsbeiträge 93, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
    2. Roessler, Christian, 2012. "A limit to price-increasing competition," Journal of Mathematical Economics, Elsevier, vol. 48(2), pages 65-76.
    3. Klaus Schöler, 2007. "Gibt es eine optimale Stadtgröße?," Volkswirtschaftliche Diskussionsbeiträge 89, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.

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    More about this item

    Keywords

    Product differentiation; Hotelling; Price and Welfare Effects of Market Entry;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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