Working Paper: CEPR ID: DP972
Authors: George Norman; Jacques-Francois Thisse
Abstract: We re-examine the economic justification for the regulation of firms' spatial price policies. Existing analysis, by treating market structure as exogenous, loses an important trade-off. Discriminatory pricing is more competitive between incumbents but acts as a strong deterrent against entry. Product variety is determined by the degree of spatial contestability of the market (the ability of entrants to make binding location commitments) and by whether firms can price discriminate. The entry deterring effect of discriminatory pricing is dominant whatever the degree of spatial contestability or the nature of demand but welfare effects depend upon the degree of spatial contestability. The lower the degree of spatial contestability, the more effective is discriminatory pricing at limiting entry and the more likely is it that mill pricing is socially desirable.
Keywords: discriminatory pricing; mill pricing; product variety; regulation; spatial contestability
JEL Codes: L13; L40; R32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| discriminatory pricing (D49) | less product variety (L15) |
| discriminatory pricing (D49) | larger firms (L25) |
| lower spatial contestability (L13) | enhances entry deterrence effect of discriminatory pricing (D49) |
| discriminatory pricing (D49) | welfare reduction for consumers (I38) |
| mill pricing (L11) | greater product variety (L15) |
| mill pricing (L11) | consumer surplus (D46) |
| ability of entrants to make binding location commitments (R32) | impact of pricing policy on product variety (L11) |
| high relocation costs (R23) | discriminatory pricing favors producers (L11) |
| low relocation costs (R38) | consumers benefit from price deregulation (L51) |