Spatial Competition and Lowest Price Commitment

Hao Wang ()
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Hao Wang: National School of Development, Peking University, Beijing 100871, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2016, vol. 11, issue 3, 519-536

Abstract: This paper suggests that credibly committing to the strictly lowest price can be profitable and self-fulfilling in a spatial price competition. Consumers live in multiple residential zones. Each zone has a store. Consumers incur heterogeneous transportation costs moving between two zones. When there is one store credibly committing to the strictly lowest price, there is a pure strategy equilibrium in which a discount store directly competes with all other stores. The discount store offers the lowest price, takes the largest market share, and makes more profits than the other stores. Moreover, the low price commitment is not binding in equilibrium, which implies that the commitment is self-fulfilling.

Keywords: convenience store; discount store; low price commitment; spatial competition (search for similar items in EconPapers)
JEL-codes: L1 M2 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:11:y:2016:i:3:p:519-536

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