Thursday, August 28, 2014
Miguel Gonzalez‐Maestre, University of Murcia, Faculty of Business and Economics, Department of Economic Analysis and Luis M. Granero, Universitat de Valencia explore Competition with Targeted Product Design: Price, Variety, and Welfare
ABSTRACT: We consider the price and welfare effects of competition in targeted product design, in the context of the Salop circle model. With an exogenous number of firms, we show that under reasonable conditions price-increasing competition takes place, for intermediate levels of the number of firms. In turn, this effect is associated with the possibility of lower consumer welfare, as a result of increased competition. With endogenous firm entry, an interesting insight from our analysis is that an increase in market size or a technological progress that reduces entry costs both might reduce consumers’ welfare.