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Can Banning Spatial Price Discrimination Improve Social Welfare?

Ziying Yang () and Felix Munoz-Garcia ()
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Ziying Yang: Southwestern University of Finance and Economics

Journal of Industry, Competition and Trade, 2018, vol. 18, issue 2, 223-243

Abstract: Abstract We analyze a two-stage sequential-move model of location and pricing to identify firm’s location, output, and welfare. We consider two pricing regimes (mill pricing and spatial price discrimination) and, unlike previous literature, allow in each of them for a non-uniform population density, non-constant location costs (i.e., the setup costs, such rental costs and land prices, differ by firm’s location), and endogenous market boundaries. Under constant location costs, our results show the firm locates at the city center under both mill and discriminatory pricing, and that output is larger under spatial price discrimination. Welfare comparisons are, however, ambiguous. Under non-constant location costs, we find the optimal location can move away from the city center, and does not coincide across pricing regimes. Compared with mill pricing, spatial price discrimination generates a higher level of output. We also find that welfare is higher (lower) under mill than under discriminatory pricing when transportation rates are low (high, respectively).

Keywords: Monopoly spatial price discrimination; Non-uniform distribution; Location choice; Social welfare; Mill pricing; Non-constant location costs (search for similar items in EconPapers)
JEL-codes: D42 D60 L12 L50 R32 (search for similar items in EconPapers)
Date: 2018
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