Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year


IMPACT FACTOR 2016: 0.252
5-year IMPACT FACTOR: 0.755

CiteScore 2016: 0.48

SCImago Journal Rank (SJR) 2016: 0.330
Source Normalized Impact per Paper (SNIP) 2016: 0.526

Online
ISSN
1935-1682
See all formats and pricing
More options …
Volume 13, Issue 2 (Jul 2013)

Issues

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

The Welfare Effects of Location and Quality in Oligopoly

Luis Carlos Corchón
  • Corresponding author
  • Department of Economics, University of Mannheim, Mannheim, Germany
  • Email:
/ Galina Zudenkova
  • Department of Economics, Universidad Carlos III de Madrid, Calle Madrid, 126, 28903 Getafe, Madrid, Spain
  • Email:
Published Online: 2013-07-30 | DOI: https://doi.org/10.1515/bejeap-2012-0045

Abstract

In this article, we show that in models where location is endogenous, maximum welfare losses arising from non-optimal locations or from the lack of market coverage may be substantial. In contrast, maximum welfare losses arising from non-optimal quality choices are more modest, but they might vary discontinuously with the dispersion in consumer tastes. Very often, welfare losses can be inferred from data.

Keywords: welfare losses; horizontal differentiation; Hotelling model; Salop model; vertical differentiation

JEL Classification: D61; L11; L13; L50

References

  • Aghion, P., and M. Schankerman. 2004. “On the Welfare Effects and Political Economy of Competition-Enhancing Policies.” Economic Journal 114:800–24.Web of ScienceCrossrefGoogle Scholar

  • Armstrong, M., and D. Sappington. 2007. “Recent Developments in the Theory of Regulation.” In Handbook of Industrial Organization, edited by M. Armstrong and R. Porter, Vol. 3, 1557–700. Netherlands: Elsevier.Google Scholar

  • Becker, G., M. DeGroot, and J. Marschak. 1964. “Measuring Utility by a Single-response Sequential Method.” Behavioral Science 9:226–36.PubMedCrossrefGoogle Scholar

  • Chen, Y., and M. H. Riordan. (2007). “Price and Variety in the Spokes Model.” Economic Journal 117:897–921.CrossrefGoogle Scholar

  • Corchón, L. 2008. “Welfare Losses under Cournot Competition.” International Journal of Industrial Organization 26:1120–31.CrossrefWeb of ScienceGoogle Scholar

  • Corchón, L., and G. Zudenkova. 2009. “Computing Welfare Losses from Data under Imperfect Competition with Heterogeneous Goods.” International Journal of Industrial Organization 27:646–54.Web of ScienceCrossrefGoogle Scholar

  • Cowling, K., and D. C. Mueller. 1978. “The Social Costs of Monopoly Power.” Economic Journal 88:727–48.CrossrefGoogle Scholar

  • Crawford, G. 2012. “Endogenous Product Choice: A Progress Report.” International Journal of Industrial Organization 30, 3:315–20.Web of ScienceCrossrefGoogle Scholar

  • Crawford, G., A. Shcherbakov, and M. Shum. 2011. “The Welfare Effects of Endogenous Quality Choice: Evidence from Cable Television Markets.” Mimeo, University of Warwick.Google Scholar

  • Draganska, M., M. Mazzeo, and K. Sei. 2009. “Beyond Plain Vanilla: Modeling Joint Product Assortment and Pricing Decisions.” Quantitative Marketing and Economics 7:105–46.Web of ScienceGoogle Scholar

  • D’Aspremont, C., J. J. Gabszewicz, and J.-F. Thisse. 1979. “On Hotelling’s Stability in Competition.” Econometrica 47:1145–50.CrossrefGoogle Scholar

  • Eaton, B. C., and R. G. Lipsey. 1978. “Freedom of Entry and the Existence of Pure Profit.” Economic Journal 88:455–69.CrossrefGoogle Scholar

  • Eaton, B. C., and R. G. Lipsey. 1981. “Capital, Commitment, and Entry Equilibrium.” Bell Journal of Economics 12:593–604.CrossrefGoogle Scholar

  • Eaton, B. C., and R. G. Lipsey. 1982. “An Economic Theory of Central Places.” Economic Journal 92:56–72.Web of ScienceCrossrefGoogle Scholar

  • Economides, N. 1984. “The Principle of Minimum Differentiation Revisited.” European Economic Review 24:345–68.CrossrefGoogle Scholar

  • Economides, N. 1986. “Minimal and Maximal Product Differentiation in Hotelling’s Duopoly.” Economics Letters 21:67–71.CrossrefGoogle Scholar

  • Economides, N. 1989. “Symmetric Equilibrium Existence and Optimality in Differentiated Product Markets.” Journal of Economic Theory 47:178–94.CrossrefGoogle Scholar

  • Eizenberg, A. 2011. “Upstream Innovation and Product Variety in the U.S. Home PC Market.” Working Paper, Hebrew University of Jerusalem.Google Scholar

  • Fan, Y. 2012. “Ownership Consolidation and Product Characteristics: A Study of the U.S. Daily Newspaper Market.” American Economic Review forthcoming.Web of ScienceGoogle Scholar

  • Gabszewicz, J. J., and J.-F. Thisse. 1979. “Price Competition, Quality and Income Disparities.” Journal of Economic Theory 20:340–59.CrossrefGoogle Scholar

  • Gabszewicz, J. J., and J.-F. Thisse. 1980. “Entry (and Exit) in a Differentiated Industry.” Journal of Economic Theory 22:327–38.CrossrefGoogle Scholar

  • Gandhi, A., L. Froeb, S. Tschantz, and G. J. Werden. 2008. “Post-Merger Product Repositioning.” Journal of Industrial Economics 56:49–67.CrossrefWeb of ScienceGoogle Scholar

  • Harberger, A. C. 1954. “Monopoly and Resource Allocation.” American Economic Review: Papers and Proceedings 44:77–87.Google Scholar

  • Horowitz, J. 2006. “The Becker-DeGroot-Marschak Mechanism Is Not Necessarily Incentive Compatible, Even for Non-Random Goods.” Economics Letters 93:6–11.CrossrefGoogle Scholar

  • Hotelling, H. 1929. “Stability in Competition.” Economic Journal 39:41–57.CrossrefGoogle Scholar

  • Leibenstein, H. 1966. “Allocative Efficiency versus X-Efficiency.” American Economic Review 56:392–425.Google Scholar

  • Salop, S. C. 1979. “Monopolistic Competition with Outside Goods.” Bell Journal of Economics 10:141–56.CrossrefGoogle Scholar

  • Shaked, A., and J. Sutton. 1982. “Relaxing Price Competition through Product Differentiation.” Review of Economic Studies 49:3–13.CrossrefGoogle Scholar

  • Shaked, A., and J. Sutton. 1983. “Natural Oligopolies.” Econometrica 51:1469–83.CrossrefGoogle Scholar

  • Tirole, J. 1988. The Theory of Industrial Organization. Cambridge, Massachusetts: MIT Press.Google Scholar

  • Tullock, G. 1967. “The Welfare Costs of Tariffs, Monopolies, and Theft.” Western Economic Journal 5:224–32.Google Scholar

  • Wauthy, X. 1996. “Quality Choice in Models of Vertical Differentiation.” Journal of Industrial Economics 44:345–53.CrossrefGoogle Scholar

About the article

Published Online: 2013-07-30


See Cowling and Mueller (1978, 728) for a summary of the criticism of Harberger’s approach.

It can be argued that lack of market coverage cannot occur once entry is allowed in the model. At this stage, however, we want to concentrate the analysis on markets with an established oligopoly in the short run, leaving the issue of entry for future research.

See Economides (1986) for the general case of with . Economides (1986) showed existence of a Subgame Perfect Nash Equilibrium for .

Following Economides (1984), we use term “touching” for an equilibrium in which the markets just touch and there is no tangency of demand.

Economides (1984) studied the case of a “not-too-high” reservation price where consumers at the edges of the market prefer not to purchase the differentiated good.

PWL could be calculated, if the reservation price was observed. The latter is usually thought to be private information but, in some cases, it can be elicited by the mechanism of Becker, DeGroot, and Marschak (1964). For the limitations of this mechanism, see Horowitz (2006) and the references there.

Knowledge of demand elasticity cannot be used to break the indeterminacy of PWL, since PWL is independent of demand elasticities (own and cross) and markups. This is explained by the fact that as demand is totally inelastic, a high price, unless it induces not buying the good, does not cause welfare losses. This makes a difference with models in which consumers may buy several goods where demand elasticities and markups can be used to find PWL, even though their impact is sometimes counterintuitive (see Corchón and Zudenkova 2009).

See Economides (1989) where this assumption emerges in equilibrium in a model which generalizes Salop model but in which transportation costs are quadratic. This is the case we consider here.

Results for linear transportation costs or positive fixed costs are available upon request.

These results generalize Wauthy’s (1996) findings for the case of zero costs.

Alternatively, only one firm may produce the whole output at the maximum quality.

Tirole (1988) made the observation that non-optimal locations or quality choices lead to distortions. Our contribution formally analyzes and quantifies these distortions.

It is important to stress that here, as well as in other equilibrium configurations in the models of horizontal and vertical differentiation, an equilibrium is unique up to a permutation of firms.


Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2012-0045.

Export Citation

©2013 by Walter de Gruyter Berlin / Boston. Copyright Clearance Center

Comments (0)

Please log in or register to comment.
Log in