Kali P. Rath & Gongyun Zhao

"Two Stage Equilibrium and Product Choice with Elastic Demand"

JEL codes: C72; C73

Abstract:  This paper examines a two stage model of product choice with elastic demand. Duopolists choose locations and then prices. Consumers´ demand is linear in price. Transportation cost is quadratic and is a lump sum. For each pair of locations, there is price equilibrium in the second stage. The first stage equilibrium locations are unique, symmetric and depend uponm the ratio of the reservation price and the transportation cost parameter. When this ratio exceeds a certain critical value, the locations are at the extreme end points of the market. As the ratio decreases, the locations gradually move towards the centre.

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