monop_variety

monop_variety - Product Variety under Monopoly 1...

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1 Product Variety under Monopoly
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ECO 171 2 Introduction ± Most firms sell more than one product ± Products are differentiated in different ways ² horizontally ± goods of similar quality targeted at consumers of different types ² how is variety determined? ² is there too much variety
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ECO 171 3 Horizontal product differentiation ± Suppose that consumers differ in their tastes ² firm has to decide how best to serve different types of consumer ² offer products with different characteristics but similar qualities ± This is horizontal product differentiation ² firm designs products that appeal to different types of consumer ² products are of (roughly) similar quality ± Questions: ² how many products? ² of what type? ² how do we model this problem?
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ECO 171 4 A spatial approach to product variety ± The spatial model (Hotelling) is useful to consider ² pricing ² design ² variety ± Has a much richer application as a model of product differentiation ² “location” can be thought of in ± space (geography) ± time (departure times of planes, buses, trains) ± product characteristics (design and variety) ² consumers prefer products that are “close” to their preferred types in space, or time or characteristics
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ECO 171 5 An example of product variety McDonald’s Burger King Wendy’s
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ECO 171 6 A Spatial approach to product variety 2 ± Assume N consumers living equally spaced along Montana Street – 1 mile long. ± Monopolist must decide how best to supply these consumers ± Consumers buy exactly one unit provided that price plus transport costs is less than V. ± Consumers incur there-and-back transport costs of t per mile ± The monopolist operates one shop ² reasonable to expect that this is located at the center of Montana
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ECO 171 7 The spatial model z = 0 z = 1 Shop 1 t x 1 Price Price All consumers within distance x 1 to the left and right of the shop will by the product All consumers within distance x 1 to the left and right of the shop will by the product 1/2 VV p 1 t x 1 p 1 + t.x p 1 + t.x p 1 + t.x 1 = V, so x 1 = (V – p 1 )/t What determines x 1 ? What determines x 1 ? Suppose that the monopolist sets a price of p 1 Suppose that the monopolist sets a price of p 1
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ECO 171 8 The spatial model 2 z = 0 z = 1 Shop 1 x 1 Price Price 1/2 VV p 1 x 1 p 1 + t.x p 1 + t.x Suppose the firm reduces the price to p 2 ? Suppose the firm reduces the price to p 2 ? p 2 x 2 x 2 Then all consumers within distance x 2 of the shop will buy from the firm Then all consumers within distance x 2 of the shop will buy from the firm
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ECO 171 9 The spatial model 3 ± Suppose that all consumers are to be served at price p . ² The highest price is that charged to the consumers at the ends of the market ² Their transport costs are t /2 : since they travel ½ mile to the shop ² So they pay p + t/ 2 which must be no greater than V.
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monop_variety - Product Variety under Monopoly 1...

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