Spatial discrimination: Bertrand vs. Cournot with asymmetric demands
Resource
Regional Science and Urban Economics, 36(6), 790-802
Journal
Regional Science and Urban Economics
Journal Volume
36
Journal Issue
6
Pages
790-802
Date Issued
2006
Author(s)
Abstract
This paper develops a barbell model a la Hwang and Mai [Hwang, H., and C.C. Mai, 1990, Effects of spatial price discrimination on output, welfare, and location, American Economic Review 80, 567-575.] with homogeneous product and asymmetric demands to compare prices, aggregate profits and social welfare between Cournot and Bertrand competition, and to analyze the firms' equilibrium locations. It focuses on the impacts of the spatial barrier generated from transport costs, and the market size effect resulting from asymmetric demands. It shows that the market-size effect is crucial in determining firms' locations under Cournot competition, but insignificant under Bertrand competition. Moreover, the equilibrium price of the large market and the aggregate profits are lower but the social welfare is higher under Cournot competition than under Bertrand competition if one of the markets is sufficiently large and the transport cost is high. © 2006 Elsevier B.V. All rights reserved.
Type
journal article