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A Unified Model of Spatial Price Discrimination

Eleftheriou, Konstantinos and Michelacakis, Nickolas (2016): A Unified Model of Spatial Price Discrimination.

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Abstract

We present a general model of n firms with differentiated production costs competing in a linear market within the framework of spatial price discrimination. We prove that the Nash equilibrium locations of firms are always socially optimal irrespective of the number of competitors, firm heterogeneity regarding marginal production costs, the level of privatization, the form of the transportation costs and the number and/or the varieties of the produced goods. An immediate implication of this result is that this form of competition is preferable from a welfare point of view. We also argue that (i) when firms are homogeneous regarding their marginal production costs, there always exists a unique Nash equilibrium, regardless of the form of the transportation cost function (ii) when firms are heterogeneous and transportation costs are linear, there is a unique Nash equilibrium which depends only on the relative mutual differences of the marginal production costs.

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