How demand affects optimal prices and product differentiation

Alessandra Chirco (), Luca Lambertini () and Fabio Zagonari

Economics of Governance, 2003, vol. 82, issue 4, 555-568

Abstract: We investigate the bearings of the level of demand on firms’ optimal locations and prices in a linear model of spatial differentiation with quadratic disutility of transportation. We show that demand affects both optimal prices and optimal locations of firms, in that firms increase product differentiation only if demand is high enough to trigger a price war. Otherwise, the non-cooperative duopoly equilibrium is observationally equivalent to the monopoly optimum with the same number of products. Contrary to the linear transportation cost case, optimal prices are everywhere increasing in the reservation price. Copyright Springer-Verlag Berlin/Heidelberg 2003

Keywords: Location; reservation price; product differentiation (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s10110-003-0173-z

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