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How demand affects optimal prices and product differentiation

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  • Alessandra Chirco
  • Luca Lambertini
  • Fabio Zagonari

Abstract

We investigate the bearings of the level of demand on firms’ optimal locations and prices in a linear model of spatial differentiation with quadratic disutility of transportation. We show that demand affects both optimal prices and optimal locations of firms, in that firms increase product differentiation only if demand is high enough to trigger a price war. Otherwise, the non-cooperative duopoly equilibrium is observationally equivalent to the monopoly optimum with the same number of products. Contrary to the linear transportation cost case, optimal prices are everywhere increasing in the reservation price. Copyright Springer-Verlag Berlin/Heidelberg 2003

Suggested Citation

  • Alessandra Chirco & Luca Lambertini & Fabio Zagonari, 2003. "How demand affects optimal prices and product differentiation," Economics of Governance, Springer, vol. 82(4), pages 555-568, November.
    • Handle: RePEc:spr:ecogov:v:82:y:2003:i:4:p:555-568
    DOI: 10.1007/s10110-003-0173-z
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    Cited by:

    1. Zacharias, Eleftherios, 2009. "Firm entry, product repositioning and welfare," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1225-1235, November.
    2. Gori, Giuseppe Francesco & Lambertini, Luca, 2013. "Trade liberalisation between asymmetric countries with environmentally concerned consumers," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 549-560.
    3. Marcella Scrimitore, 2003. "Symmetric and Asymmetric Equilibria in a Spatial Duopoly," ERSA conference papers ersa03p194, European Regional Science Association.
    4. Dragone, Davide & Lambertini, Luca, 2020. "Equilibrium existence in the Hotelling model with convex production costs," Regional Science and Urban Economics, Elsevier, vol. 84(C).

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