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Spatial Competition with Capacity Constraints and Subcontracting

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  • Hunold, Matthias
  • Muthers, Johannes

Abstract

We characterize mixed-strategy equilibria when capacity constrained suppliers can charge location-based prices to different customers. We establish an equilibrium with prices that weakly increase in the costs to supply a customer. Despite prices above costs and excess capacities, each supplier exclusively serves its home market in equilibrium. Competition yields volatile market shares and an inefficient allocation of customers to firms. Even ex-post cross-supplies may restore efficiency only partly. We use our findings to discuss recent competition policy cases and provide hints for a more refined coordinated-effects analysis.

Suggested Citation

  • Hunold, Matthias & Muthers, Johannes, 2018. "Spatial Competition with Capacity Constraints and Subcontracting," DICE Discussion Papers 254, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  • Handle: RePEc:zbw:dicedp:254
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    References listed on IDEAS

    as
    1. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    2. Hunold, Matthias & Hüschelrath, Kai & Laitenberger, Ulrich & Muthers, Johannes, 2017. "Competition, collusion and spatial sales patterns: Theory and evidence," ZEW Discussion Papers 17-035, ZEW - Leibniz Centre for European Economic Research.
    3. Robert Somogyi, 2013. "Bertrand-Edgeworth competition with substantial product differentiation," IEHAS Discussion Papers 1332, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    4. Pio Baake & Jörg Oechssler & Christoph Schenk, 1999. "Explaining cross-supplies," Journal of Economics, Springer, vol. 70(1), pages 37-60, February.
    5. Esteves, Rosa-Branca, 2010. "Pricing with customer recognition," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 669-681, November.
    6. Canoy, Marcel, 1996. "Product Differentiation in a Bertrand-Edgeworth Duopoly," Journal of Economic Theory, Elsevier, vol. 70(1), pages 158-179, July.
    7. Justin Marion, 2015. "Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 100-128, March.
    8. Sinitsyn, Maxim, 2009. "Price dispersion in duopolies with heterogeneous consumers," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 197-205, March.
    9. Maxim Sinitsyn, 2008. "Technical Note--Price Promotions in Asymmetric Duopolies with Heterogeneous Consumers," Management Science, INFORMS, vol. 54(12), pages 2081-2087, December.
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    Cited by:

    1. Anna Goeddeke & Justus Haucap & Annika Herr & Christian Wey, 2018. "Flexibility in Wage Setting Under the Threat of Relocation," LABOUR, CEIS, vol. 32(1), pages 1-22, March.
    2. Hunold, Matthias & Hüschelrath, Kai & Laitenberger, Ulrich & Muthers, Johannes, 2017. "Competition, collusion and spatial sales patterns: Theory and evidence," ZEW Discussion Papers 17-035, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    Keywords

    Bertrand-Edgeworth; capacity constraints; inefficient competition; spatial price discrimination; subcontracting; transport costs;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics

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