Location choices and third‐degree spatial price discrimination

Abstract

This paper studies how firms choose their product differentiation levels when they engage in third‐degree price discrimination in the following product market competition in a location‐price model. We show that firms will not choose to locate at the two endpoints if different consumer groups have similar sizes. Hence, the principle of maximum differentiation does not hold, resulting in a more intense product market price competition. Only if the size of one group of consumers is sufficiently larger than that of the other group, would firms make their products as differentiated as possible by choosing the two endpoints as their locations.

Impact of Third-Degree Price Discrimination on Welfare under the Asymmetric Price Game

“…They show that if the quality levels of the local firms' products are the same, price discrimination always increases welfare, mainly because of a positive allocation effect of price discrimination [17]. Feng and Ma investigated (2018) how firms choose their level of product differentiation when engaging in third-degree price discrimination in a competitive product market; their results show that firms will only set themselves at the two end points to make their products as differentiated as possible if one group of consumers is sufficiently larger than the other [18]. Zhang, T. et al, (2019) considered location monopoly and found that price discrimination improves social welfare when demand elasticity is large enough [19].…”

Attention, Focus, and Economic Behavior

“…In contrast, in our model, firms can choose their location and thereby influence the segmentation. In addition, in contrast to our model in Liu and Serfes (2004) and Feng and Ma (2018) consumers in all segments are aware of all firms.…”

“…In particular, we analyze whether consumers benefit from higher levels of perception. Although firms in our analysis discriminate with respect to the perception of consumers, because of our setup this corresponds to charging different segments on the Hotelling line different prices (e.g., Fudenberg and Tirole, 2000;Liu and Serfes, 2004;Choe, King, and Matsushima, 2018;Feng and Ma, 2018). 11 In Fudenberg and Tirole (2000) and Choe, King, and Matsushima (2018), a firm offers different prices to its own past consumers and its rival's past consumers.…”

“…Feng and Ma (2018) analyze the location decision of firms that face an exogenous segmentation and find that maximum product differentiation no longer holds universally. Although, the two segment case in Liu and Serfes (2004) and Feng and Ma (2018) corresponds to our setup in the sense that firms choose two different prices, they model the segmentation as exogenous. In contrast, in our model, firms can choose their location and thereby influence the segmentation.…”