Firm Entry, Product Repositioning and Welfare

Posted by D. Daniel Sokol

Eleftherios Zacharias (Athens University of Economics and Business), examines Firm Entry, Product Repositioning and Welfare.

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.