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Spatial Competition with Capacity Constraints and Subcontracting

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  • Hunold, Matthias
  • Muthers, Johannes

Abstract

We characterize mixed-strategy equilibria when capacity constrained suppliers can charge location-based prices to different customers. We establish an equilibrium with prices that weakly increase in the costs to supply a customer. Despite prices above costs and excess capacities, each supplier exclusively serves its home market in equilibrium. Competition yields volatile market shares and an inefficient allocation of customers to firms. Even ex-post cross-supplies may restore efficiency only partly. We use our findings to discuss recent competition policy cases and provide hints for a more refined coordinated-effects analysis.

Suggested Citation

  • Hunold, Matthias & Muthers, Johannes, 2018. "Spatial Competition with Capacity Constraints and Subcontracting," DICE Discussion Papers 254, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), revised 2018.
    • Handle: RePEc:zbw:dicedp:254
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    References listed on IDEAS

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    1. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    2. Matthias Hunold & Kai Hüschelrath & Ulrich Laitenberger & Johannes Muthers, 2020. "Competition, Collusion, and Spatial Sales Patterns: Theory and Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 68(4), pages 737-779, December.
    3. Robert Somogyi, 2013. "Bertrand-Edgeworth competition with substantial product differentiation," CERS-IE WORKING PAPERS 1332, Institute of Economics, Centre for Economic and Regional Studies.
    4. Pio Baake & Jörg Oechssler & Christoph Schenk, 1999. "Explaining cross-supplies," Journal of Economics, Springer, vol. 70(1), pages 37-60, February.
    5. Esteves, Rosa-Branca, 2010. "Pricing with customer recognition," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 669-681, November.
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    7. Justin Marion, 2015. "Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 100-128, March.
    8. Sinitsyn, Maxim, 2009. "Price dispersion in duopolies with heterogeneous consumers," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 197-205, March.
    9. Hans-Theo Normann & Elaine S. Tan, 2014. "Effects of different cartel policies: evidence from the German power-cable industry," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 23(4), pages 1037-1057.
    10. Maxim Sinitsyn, 2008. "Technical Note--Price Promotions in Asymmetric Duopolies with Heterogeneous Consumers," Management Science, INFORMS, vol. 54(12), pages 2081-2087, December.
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    Cited by:

    1. Matthias Hunold & Kai Hüschelrath & Ulrich Laitenberger & Johannes Muthers, 2020. "Competition, Collusion, and Spatial Sales Patterns: Theory and Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 68(4), pages 737-779, December.
    2. Anna Goeddeke & Justus Haucap & Annika Herr & Christian Wey, 2018. "Flexibility in Wage Setting Under the Threat of Relocation," LABOUR, CEIS, vol. 32(1), pages 1-22, March.

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    More about this item

    Keywords

    Bertrand-Edgeworth; capacity constraints; inefficient competition; spatial price discrimination; subcontracting; transport costs;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics

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