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Consumer flexibility, data quality and location choice

  • Baye, Irina
  • Hasnas, Irina
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    We analyze firms' location choices in a Hotelling model with two-dimensional consumer heterogeneity, along addresses and transport cost parameters (flexibility). Firms can price discriminate based on perfect data on consumer addresses and (possibly) imperfect data on consumer flexibility. We show that firms' location choices depend on how strongly consumers differ in flexibility. Precisely, when consumers are relatively homogeneous, equilibrium locations are socially optimal regardless of the quality of customer flexibility data. However, when consumers are relatively differentiated, firms make socially optimal location choices only when customer flexibility data is perfect. These results are driven by the optimal strategy of a firm on its turf, monopolization or market-sharing, which in turn depends on consumer heterogeneity in flexibility. Our analysis is motivated by the availability of customer data, which allows firms to practice third-degree price discrimination based on both consumer characteristics relevant in spatial competition, addresses and transport cost parameters.

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    Paper provided by Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 139.

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    Date of creation: 2014
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    Handle: RePEc:zbw:dicedp:139
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    1. Qihong Liu & Konstantinos Serfes, 2002. "Quality of Information and Oligopolistic Price Discrimination," Industrial Organization 0207007, EconWPA.
    2. Hamilton, Jonathan H. & Thisse, Jacques-Francois, 1992. "Duopoly with spatial and quantity- dependent price discrimination," Regional Science and Urban Economics, Elsevier, vol. 22(2), pages 175-185, June.
    3. IRMEN, Andreas & THISSE, Jacques-Francois, 1997. "Competition in multi-characteristics spaces: hotelling was almost right," CORE Discussion Papers 1997053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Valletti, Tommaso M., 2002. "Location choice and price discrimination in a duopoly," Regional Science and Urban Economics, Elsevier, vol. 32(3), pages 339-358, May.
    5. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May.
    6. Sapi, Geza & Suleymanova, Irina, 2013. "Consumer flexibility, data quality and targeted pricing," DICE Discussion Papers 117, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    7. Nicola Jentzsch & Geza Sapi & Irina Suleymanova, 2010. "Joint Customer Data Acquisition and Sharing among Rivals," Discussion Papers of DIW Berlin 1045, DIW Berlin, German Institute for Economic Research.
    8. Anderson, Simon P & de Palma, Andre, 1988. "Spatial Price Discrimination with Heterogeneous Products," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 573-92, October.
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