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Price Responses to Market Entry With and Without Endogenous Product Choice

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  • Helge Sanner

Abstract

Textbook wisdom says that competition yields lower prices and higher consumer surplus than monopoly. We show in two versions of a simple location-product differentiation model with and without endogenous choice of products that these two results have to be qualified. In both models, more than half of the reasonable parameter values lead to higher prices with duopoly than with monopoly. If the product characteristics are exogenous to the firms, consumers may even be be better off with monopoly in average.

Suggested Citation

  • Helge Sanner, 2005. "Price Responses to Market Entry With and Without Endogenous Product Choice," Volkswirtschaftliche Diskussionsbeiträge 81, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
    • Handle: RePEc:pot:vwldis:81
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    References listed on IDEAS

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    6. Anderson, S., 1986. "Equilibrium existence in the circle of product differentiation," LIDAM Discussion Papers CORE 1986006, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    8. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
    9. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
    10. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
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    Cited by:

    1. Roessler, Christian, 2012. "A limit to price-increasing competition," Journal of Mathematical Economics, Elsevier, vol. 48(2), pages 65-76.
    2. Klaus Schöler, 2007. "Gibt es eine optimale Stadtgröße?," Volkswirtschaftliche Diskussionsbeiträge 89, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
    3. Albrecht Kauffmann, 2007. "Transport Costs and the Size of Cities : the Case of Russia," Volkswirtschaftliche Diskussionsbeiträge 93, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.

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    More about this item

    Keywords

    Product differentiation; Hotelling; Price and Welfare Effects of Market Entry;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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