Price discrimination and equilibrium in monopolistic competition

W. B. MacLeod, G. Norman, J. F. Thisse

Research output: Contribution to journalArticlepeer-review

58 Scopus citations

Abstract

Modern theories of monopolistic competition have borrowed extensively from techniques developed in location theory and the theory of spatial pricing: the monopolistically competitive firm is assumed to choose a 'location' and price for its product. A subject that has been of increasing concern in this corpus of theory is that there exists no free-entry price-location equilibrium. In this paper we demonstrate that free-entry price-location equilibrium exists provided only that producers are allowed to price discriminate among customers in a reasonable manner. Equilibrium is modelled as a two-stage game using the Selten concept of subgame perfect Nash equilibrium. It is shown that the equilibrium discriminatory price system is one initially identified by Hoover. In addition, we show that equilibrium is not unique. The precise nature of equilibrium in a particular market will be dependent upon the history of that market.

Original languageEnglish (US)
Pages (from-to)429-446
Number of pages18
JournalInternational Journal of Industrial Organization
Volume6
Issue number4
DOIs
StatePublished - 1988
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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