Transport Cost Sharing and Spatial Competition

Sudipta Sarangi and Hrachya Kyureghian

No 406, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We consider a linear city model where both firms and consumers have to incur transport costs. Following a standard Hotelling (1929) type framework we analyze a duopoly where firms facing a continuum of consumers choose locations and prices, with the transportation rate being linear in distance. From a theoretical point of view such a model is interesting since mill pricing and uniform delivery pricing arise as special cases. Given the complex nature of the profit function for the two-stage transport cost sharing game, we invoke simplifying assumptions and solve for two different games. We provide a complete characterization for the equilibrium of the location game between the duopolists by removing the price choice from the strategy space. We then find that if the two firms are constrained to locate at the same spot, the resulting price competition leads to a mixed strategy equilibrium with discriminatory rationing. In equilibrium both firms always have positive expected profits. Finally, we derive a pure strategy equilibrium for the two-stage game. Results are then compared with the mill pricing and uniform delivery pricing models.

Keywords: Spatial competition; Cost sharing (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 R1 (search for similar items in EconPapers)
Pages: I, 27 p.
Date: 2004
New Economics Papers: this item is included in nep-ure
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Working Paper: Transport Cost Sharing and Spatial Competition (2001)
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