On the strategic choice of spatial price policy: the role of the pricing game rules
Ana María Martín Arroyuelos, Iñaki Aguirre
Abstract
Ana María Martín Arroyuelos, Iñaki Aguirre
Abstract
In this paper, whe show that the strategic choice of spatial price policy under duopoly crucially depends on the rules of price competition. Thisse and Vives (1988) show that spatial price discrimination is a dominant strategy when the mill pricing firm is the leader and the discriminatory firm is the follower. When the leader-follower roles are reversed we find that equilibrium pricing policies depend on the consumer's reservation value. The pricing policy game has two equilibria in pure strategies, either both firms price uniformly (f.o.b.) or both firms price discriminate, when the reservation value is low. For intermediate levels of the reservation value, price discrimination is a dominant strategy and the pricing policy game is similar to a Prisoner's Dilemma. When the consumer reservation value is large enough we obtain asymmetric equilibria in which one firm prices according to f.o.b. and the other price discriminates. We also analyze the case of simultaneous price competition and find a mixed strategies equilibrium for the price competition subgame such that the pricing policy game has two equilibria in pure strategies, either both firms price uniformly or both firms price discriminate.
OpenAlex reports 2 citations for this work. Citation counts describe recorded attention and do not establish research quality.
A contribution statement is not available in the OpenAlex record.
Method details are not available in the OpenAlex metadata.
Findings are not separately available in the OpenAlex metadata.
Limitations are not available in the OpenAlex metadata.
Application details are not available in the OpenAlex metadata.
In this paper, whe show that the strategic choice of spatial price policy under duopoly crucially depends on the rules of price competition. Thisse and Vives (1988) show that spatial price discrimination is a dominant strategy when the mill pricing firm is the leader and the discriminatory firm is the follower. When the leader-follower roles are reversed we find that equilibrium pricing policies depend on the consumer's reservation value. The pricing policy game has two equilibria in pure strategies, either both firms price uniformly (f.o.b.) or both firms price discriminate, when the reservation value is low. For intermediate levels of the reservation value, price discrimination is a dominant strategy and the pricing policy game is similar to a Prisoner's Dilemma. When the consumer reservation value is large enough we obtain asymmetric equilibria in which one firm prices according to f.o.b. and the other price discriminates. We also analyze the case of simultaneous price competition and find a mixed strategies equilibrium for the price competition subgame such that the pricing policy game has two equilibria in pure strategies, either both firms price uniformly or both firms price discriminate.
Key concepts: Microeconomics, Reservation price, Duopoly, Economics, Price discrimination, Limit price, Mid price, Value (mathematics)