Monday, March 19, 2012
Posted by D. Daniel Sokol
Yiquan Gu (Technische Universit at Dortmund) and Tobias Wenzel (Dusseldorf Institute for Competition Economics) discuss Price-dependent demand in spatial models.
ABSTRACT: This paper introduces price-dependent individual demand into the circular city model of product differentiation. We show that for any finite number of firms, a unique symmetric price equilibrium exists provided that demand functions are not too convex. As in the case of unit demand, the number of firms under free entry decreases in the fixed cost of entry while increases in the transportation cost of consumers. However, this number is no longer always in excess of the socially optimal level. Insufficient entry occurs when the fixed and transportation costs are high.