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Firm entry, product repositioning and welfare

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  • Eleftherios Zacharias

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.

Suggested Citation

  • Eleftherios Zacharias, 2009. "Firm entry, product repositioning and welfare," EERI Research Paper Series EERI_RP_2009_17, Economics and Econometrics Research Institute (EERI), Brussels.
    • Handle: RePEc:eei:rpaper:eeri_rp_2009_17
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    File URL: http://www.eeri.eu/documents/wp/EERI_RP_2009_17.pdf
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Horizontal di¤erentiation; welfare analysis; product repositioning.;
    All these keywords.

    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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