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How demand affects optimal prices and product differentiation *
Author(s) -
Chirco Alessandra,
Lambertini Luca,
Zagonari Fabio
Publication year - 2003
Publication title -
papers in regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.937
H-Index - 64
eISSN - 1435-5957
pISSN - 1056-8190
DOI - 10.1007/s10110-003-0173-z
Subject(s) - duopoly , product differentiation , economics , monopoly , microeconomics , product (mathematics) , reservation , computer science , cournot competition , mathematics , geometry , computer network
. 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.