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Firm entry, product repositioning and welfare

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  • Zacharias, Eleftherios

Abstract

We show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer's surplus possibly decrease. We first derive the price and the consumer's surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer's surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.

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  • Zacharias, Eleftherios, 2009. "Firm entry, product repositioning and welfare," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1225-1235, November.
    • Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1225-1235
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    Cited by:

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    2. Balan, David J. & Deltas, George, 2013. "Better product at same cost, lower sales and lower welfare," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 322-330.

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    More about this item

    Keywords

    Horizontal differentiation Welfare analysis Product repositioning;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General

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