Uniform Pricing Versus Mill Pricing

This paper analyzes the coexistence of different pricing strategies. The purpose is to discuss how firms that are limited to uniform pricing affect the outcome of price competition among mill–price–setting firms. Price competition among (three) firms that are restricted to mill pricing is analyzed within the classic Hotelling framework and uniform–price–setting firms are considered as first movers. If uniform–price–setting firms deliver any good, they effectively separate mill–price–setting firms from each other. Finally, it is shown that price competition among first movers strengthens the effects of cross–type price competition.     

SPATIAL COMPETITION À LA COURNOT: PRICE DISCRIMINATION BY QUANTITY-SETTING OLIGOPOLISTS*

In this paper, we consider oligopolistic competition in a spatial model when firms take care of goods' delivery and discriminate among consumers. Firms compete by setting quantity schedules independently over space. We show that under general conditions a Nash equilibrium in this game exists and is unique. In equilibrium, firms’ markets overlap, a feature which accords with intuition and empirical observations. Over the interval between two firms, the equilibrium spatial price schedule is quasi-concave (quasi-convex) when transport costs are concave (convex). With linear transport costs, the model predicts uniform delivered pricing. Uniform pricing could moreover be obtained by a combination of increasing returns to volume in transportation together with concavity of unit transport costs in distance.     

SPATIAL PRICING IN INTERDEPENDENT MARHETS*

ABSTRACT. Conditions for spatial price equilibrium are derived for a set of firms in oligopolistic spatial competition, distributed at fixed locations in a heterogeneous region where consumer purchasing patterns are a probabilistic function of the price distribution rather than a deterministic function of proximity to firms. The resulting prices vary with accessibility to consumers or with the degree of local spatial monopoly, and result in non-zero profits for firms. Conditions describing the existence and stability properties of this spatial price equilibrium are defined, and are shown to be equivalent for two different hypotheses concerning disequilibrium pricing behavior: a partial price adjustment model and a Bertrand game. For two different profit goals, total profit maximization and profit rate maximization, it is shown that a spatial price equilibrium exists and is at least locally quasi-stable.     

PRODUCT DIFFERENTIATION,PRICING POLICY AND EQUILIBRIUM*

ABSTRACT. This paper studies the price-location equilibrium of duopolists supplying differentiated goods and competing in a spatial market with elastic demand. We show that a price-location equilibrium exists under all three pricing policies traditionally considered by the literature: f.o.b. mill, uniform delivered, and spatially discriminatory pricing. We also show that firms always cluster at the market center. The second part of the paper studies the endogenous choice of pricing policy. A surprising feature of the resulting equilibrium is asymmetry. The greater the extent to which the goods are substitutes, the more likely is it that one firm will choose f.o.b. pricing and the other price discrimination. Finally, the welfare consequences of the analysis show some interesting trade-offs.     

MILL AND UNIFORM PRICING A COMPARISON*

ABSTRACT. In this paper we examine profit, price, output and welfare under mill and uniform pricing in a monopolistic spatial market with nonlinear demand, a general consumer distribution function, and a general transportation cost function. We show that if demand is convex (concave) then the optimal uniform price minus the average unit transportation cost is lower (higher) than the optimal mill price, output under uniform pricing is lower (higher) than output under mill pricing, and welfare under uniform pricing is lower (higher) than welfare under mill pricing, provided other respective conditions are satisfied.     

MILL PRICING AND SPATIAL PRICE DISCRIMINATION MONOPOLY PERFORMANCE AND LOCATION WITH SPATIAL RETAIL MARKETS*

ABSTRACT. Most of the monopoly spatial price discrimination literature explicitly assumes uniform population density over space. It also implicitly assumes that firms (plants) are spatially isolated from each other with production and retail points that coincide in location. While departures from these assumptions have been explored separately in the literature, it remains to examine performance and location when these assumptions are relaxed simultaneously. What emerges in this paper is a model where density functions approximate a pair of cities isolated from other cities. Each city has its own retail market, while the location of a single production or wholesale point is determined by characteristics of the two markets. Comparisons of mill pricing and spatial price discrimination found in the spatial monopoly literature can be interpreted as special cases of the more general framework provided here.     

Spatial Price Discrimination in Two-Dimensional Competitive Markets

Intuition suggests that firms that can apply price discrimination make higher profits than firms that are restricted in their pricing policy. In this paper, we show that, in general, this is not the case. In the framework of a two-dimensional spatial model with elastic demand à la Lösch, we further investigate the interplay of transport costs, competition, and price policy. One of our results is that under realistic specifications of parameters each firm gains a monopolistic area in the center of its market that has the same shape as the entire market, but with a convexly or concavely distorted separating line, depending on the extension of the market.     

Spatial Pricing Policies Reconsidered: Monopoly Performance and Location

This paper reexamines the welfare implications of three pricing regimes (mill, uniform, and discriminatory) for a monopoly. Assuming linear demand and constant marginal costs, I show that with the introduction of endogenous location choice, uniform delivered pricing may provide the highest social welfare when demands in different markets are sufficiently heterogeneous; whereas discriminatory pricing always dominates uniform pricing when demands in different markets are similar.     

Competitive Location and Pricing on Networks

In this paper we consider a location and pricing model for a retail firm that wants to enter a spatial market tvhere a competitor firm is already operating as a monopoly with several outlets. The entering firm seeks to determine the optimal uniform mill price and its servers' locations that maximize profits given the reaction in price of the competitor firm to its entrance. A tabu search procedure is presented to solve the model together with computational experience and an example.     

Competitive Location and Pricing on Networks

In this paper we consider a location and pricing model for a retail firm that wants to enter a spatial market where a competitor firm is already operating as a monopoly with several outlets. The entering firm seeks to determine the optimal uniform mill price and its servers' locations that maximize profits given the reaction in price of the competitor firm to its entrance. A tabu search procedure is presented to solve the model together with computational experience and an example.     

THE WELFARE ASPECTS OF SPATIAL PRICING POLICIES RECONSIDERED FOR A MONOPOLY CASE*

ABSTRACT. We reexamine the price structures and their welfare implications in three pricing regimes (mill, uniform and discriminatory) for a monopoly. We show that spatial price discrimination could provide the highest social welfare and, when consumers tastes are heterogeneous enough, also the highest consumer surplus. The superiority of spatial price discrimination is partially due to the larger output produced and partially due to differential treatment for consumers with heterogeneous tastes.     

THE OUTPUT EFFECTS OF SPATIAL PRICE DISCRIMINATION REVISITED*

ABSTRACT Some prior findings on spatial price discrimination are extended. Under certain spatially defined market conditions, discriminatory pricing is known to yield greater output than does nondiscriminatory f.o.b. mill pricing. However, this seemingly surprising result is based on the form of the basic demand function which is relatively less convex than a certain standard curve. The present paper makes this prior result more general by permitting the assumed basic demand to be relatively more convex.     

LOCATING OUTSIDE A LINEAR CITY CAN BENEFIT CONSUMERS*

ABSTRACT We investigate the effects of restricting the locations of firms in Hotelling duopoly models. In standard location‐price models, the equilibrium distance between firms is too great from the viewpoint of consumer welfare. Thus, restricting the locations of firms and shortening the distance between them improves consumer welfare by reducing prices and transport costs. We introduce strategic reward contracts into location‐price models and find that, in contrast to the above result, restrictions on the locations of firms reduce consumer welfare. These restrictions reduce transport costs but increase prices by changing the strategic commitments of the firms.     

PRICING POLICY REACTIONS TO AGGLOMERATION IN A MARKET WITH SPATIAL SEARCH*

ABSTRACT. Price dispersion (variation) and agglomeration are common characteristics of spatial markets, in particular, markets with imperfect consumer information and search. However, pricing and location strategies in these markets are not well analyzed since spatial search is difficult to model without restricting the spatial dimension of the problem. This paper analyzes pricing and location strategies in a market with spatid search using a probabilistic modeling strategy that does not restrict search patterns in the plane. Specifically, the analysis considers the pricing strategy of an isolated firm in response to the agglomeration of competing firms. Results indicate that spatial and temporal price dispersion are effective responses to competitors'agglomeration. However, the relative effectiveness of these strategies varies with market conditions. In addition, agglomeration can have some counterintuitive effects. This paper also provides insights into existing theories of spatial search and spatial competition in spatially-restricted (linear and circular) markets.     

THE SPATIAL MONOPSONY: A THEORETICAL ANALYSIS*

ABSTRACT. In this paper some of the most important properties of the behavior of a spatial monopsonist are derived. Many results are mirror images of corresponding results for the spatial monopolist. A few results are, however, genuinely new. A lot of effort is spent in comparing the properties of the profit function under three different pricing policies, f.o.b. (mill)-pricing, uniform delivered pricing, and spatial price discrimination. It is shown, for example, how the profitability and welfare consequences of the different policies are related to the shapes of the supply and demand functions. It is argued that the theory may have important applications in economic analyses of renewable natural resources such as forests, where total transportation costs are nonnegligible.     

ZONE PRICING*

ABSTRACT. Our purpose is to study a spatial price policy often encountered in the real world, known as zone pricing. This price policy consists in determining simultaneously several delivered prices together with the geographical zones in which they apply. It is shown that zone pricing approximates perfect spatial price discrimination and that the firm's profit increases with the number of zones. Furthermore, the number of markets supplied by the firm rises with the number of zones. Finally, zone pricing is compared to other standard spatial price policies and possible extensions are discussed.     

DEREGULATING THE DISTRIBUTION OF ELECTRICITY: PRICE AND WELFARE CONSEQUENCES OF SPATIAL OLIGOPOLY WITH UNIFORM DELIVERED PRICES*

ABSTRACT. Theoretical, spatial oligopoly models are developed and calibrated to simulate the price and welfare consequences of deregulating the retail price of electricity (the distribution function), assuming competing sources of generation supply are available. Two types of distribution competition are considered, retaining the currently used uniform delivered pricing structure: competition for customers at neighboring utilities’ borders and franchise competition. Because duplicate facilities are required for borderline competition, short-run price increases ranging between 14 and 37 percent over existing regulated prices are estimated for upstate New York, largely because deregulated prices reflect replacement, not historic, costs of facilities.     

Re-investing in the Built Environment: A Spatial Network Approach

Before launching ambitious and expensive development programmes to induce new regional technology corridors and clusters, it is critical to appreciate existing spatial economic patterns in a region. Initial economic conditions drive location decisions of firms and a labour force such that any changes must intercede onto an existing landscape built for current economic conditions. This work adopts a simple regional economic model to integrate and review traditional and modern urban location theories in order to illustrate the power of initial conditions to determine a final result. A simple spatial dynamic simulation model captures many of the pertinent effects of real estate pricing patterns to frame both opportunities and constraints to re-shape an urban landscape. Attention to 'ground up' spatially correlated location patterns revealed in price data that suggests close attention to strategic zoning can have profound impacts on the success or failure of economic development. Relatively modest policy interventions that carefully utilize existing preferences for urban amenities and concurrent real property investments involve fewer policy risks with potentially more powerful stimulative economic consequences than promised in more ambitious programmes.     

Asymmetric Entrant Locaiton with a Discrete Consumer Distribution: Spatial Price Discrimination Versus Mill Pricing

In this paper I examine the profit-maximizing locations of entrants. Suppose that firms practice spatial price discrimination and consumer locations are discrete, such as five equally spaced towns on a roadway. With completely inelastic consumer demand an entrant between two existing firms is often indifferent between the symmetric (central) location and a continuum of asymmetric (noncentral) locations. However, downward-sloping consumer demand often causes the entrant to strictly prefer either of two asymmetric locations to any other location. These results are very different from those found in mill-pricing (free-on-board or f.o.b.-pricing) models.     

Designing Markets: Why Competitive Bidding and Auctions in Government Often Fail To Deliver

Governments continue to embrace the market‐like mechanisms of auctions and bidding. This essay considers how governments (as bid‐takers) and firms and nonprofits (as bidders) strategically interact in the design and implementation of these systems. I assess with regard to the uniqueness of bidding in government four principles on the role of: credible commitments, rational collusion, the setting of reserve prices, and heterogeneity among bidders. I also address recent calls for expanding the use of dynamic pricing in government.