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Quality-price choices and market configurations when location matters

Author

Listed:
  • Pires, Cesaltina Pacheco
  • Catalão-Lopes, Margarida
  • Jorge, Sílvia Ferreira
  • Garcês, Pedro

Abstract

This paper investigates how preexistent asymmetries in the way consumers value each firm’s product influence quality-price decisions when consumers differ in quality valuation but incur a transportation cost when buying from the firm located on the periphery. We show that for a given location, the high-quality firm charges a higher price and that for given qualities, the firm located in the center charges higher prices. Regarding quality choices, we show that the firm located in the center may be able to behave as a partial coverage monopolist. Under duopoly, quality differentiation always exists, and in general, the high-quality firm may be located either in the center or on the periphery. Moreover, the qualities offered by both firms are higher when the high-quality firm is on the periphery, showing a substitutability effect between location and quality. Thus, incentivizing the high-quality firm to locate on the periphery improves overall market quality.

Suggested Citation

  • Pires, Cesaltina Pacheco & Catalão-Lopes, Margarida & Jorge, Sílvia Ferreira & Garcês, Pedro, 2024. "Quality-price choices and market configurations when location matters," Economic Modelling, Elsevier, vol. 135(C).
    • Handle: RePEc:eee:ecmode:v:135:y:2024:i:c:s0264999324000841
    DOI: 10.1016/j.econmod.2024.106728
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    More about this item

    Keywords

    Vertical differentiation; Quality-price mix; Central business district; Hedonic house pricing; Endogenous market configurations;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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