Oligopoly on a Salop Circle with Centre

Abstract

We study an oligopolistic market in which consumers located around the perimeter of a Salop circle buy either from firms around this perimeter (providing horizontally differentiated goods) or from a firm located at the centre of the circle (providing a homogeneous good). An entry-pricing game is studied. The market equilibria and social optima indicate various possible market failures, including cases in which the market is served only by perimeter firms whilst central provision would be socially optimal (in this sense, more extreme than the standard Salop excessive product differentiation). Moreover, for some parameters, the standard Salop result might be reversed.

Pharmaceutical Regulation, Mandatory Substitution, and Generic Competition

“…Following Madden & Pezzino (2011), the …rms o¤ering the di¤erentiated generic versions g (i) are located equidistantly around the perimeter of a unit circle, the …rm providing the brand-name drug is located in the center of the circle.…”

“…Following Madden & Pezzino (2011), it assumes a market for an active ingredient, where consumers are located on the circumference of a Salop circle and may choose between an o¤-patent brand-name version of the drug (center of the circle) and one of n horizontally di¤erentiated generic versions (on the circumference). This allows considering two dimensions of generic competition, the generic market share and the number of generic competitors.…”

Complexity and Geographical Economics

“…16 A consequence of this assumption is that social welfare in the model essentially coincides with an inverse measure of the transportation costs incurred by all consumers. 17 Bouckaert (2000) and Madden and Pezzino (2011) extend the Salop model allowing a firm to take a location in the center. This extension allows for the study of markets where high street shops compete with Internet/mail order rivals.…”

“…The presence of central firm, as described in Madden and Pezzino (2011) may be another source of endogenous spillovers. See Fig.…”

“…Through competition with the center, perimeter firms may benefit from the R&D investments of all rivals in the market. It follows that a regulator should assess the presence of a central, homogeneous product firm, not only on the basis of the effects produced on the aggregate transportation costs incurred by consumers (as considered in Madden and Pezzino 2011), but also on the quality-enhancing effects that may be created due to R&D spillovers.…”