A theoretical analysis of the effects of spatial competition on pricing

Abstract

There has been great controversy in recent theoretical discussions on the price effects of spatial competition. The central issue has been whether the general conclusions of classical price theory hold in a spatial context. Since the controversies generally arise from varying theoretical hypotheses used in each analysis, the basic objective of this dissertation is to reconcile conflicting results of recent research and to set forth general conditions under which spatial competition may generate results which contradict neoclassical competitive theory. As its starting point, this dissertation examines three aspects of spatial competition under the f.o.b. mill price policy: (1) the comparative prices between a spatial competitor and a spatial monopolist, (2) the short-run competitive prices given the alternative price conjectural variations of Loschian competition, Hotelling-Smithies competition, and and Greenhut-Ohta competition, and (3) the price effects of spatial competition under free entry. In examining these topics, three distinct properties have been of great significance: (1) the relation between the elasticity of spatial aggregate demand and the elasticities of the spatial individual demands, (2) the comparative market area sizes of the spatial monopolist and a spatial competitor, and (3) the varying expected (ex ante) market areas under alternative competitive conjectural variations. With the general demand conditions set forth in the mill pricing model, the dissertation proceeds to examine a spatial competitor's profit-maximizing discriminatory price policy. It is found that spatial price discrimination invariably generates greater profits for any given market area size. Thus the profit-maximizing, spatially competitive firm typically would adopt a discriminatory price policy provided it is free from institutional constraints.In summary, the main contributions of the dissertation are: (1) the emphasis on the relation between the elasticity of spatial aggregate demand and the elasticities of spatial individual demands, (2) the inclusion of competition effect in analyzing the price effects of competitive entry, and (3) the evaluation of alternative price policies under identical market area size of a spatial competitor.