Pricing policy in spatial competition

In this paper, we analyze a spatial oligopoly a la Hotelling assuming Norman and Thisse (1996, Product variety and welfare under discriminatory and mill pricing policies. Economic Journal 106 (1996) 76-91) spatial non-contestability. Each firm selects a pricing strategy in the first stage and chooses a price (schedule) in the second. Seeking subgame perfect Nash equilibrium, we obtain the following. First, mill pricing strategy may become prevalent due to improvements in transportation technology, whereas the discriminatory pricing strategy would be dominant when economies of scale become large. Second, for any pricing strategy, the equilibrium number of mill pricing firms is too large in comparison to the social optimum one, whereas the equilibrium number of discriminatory pricing firms is too small. Finally, we observe a hysteresis in the spatial arrangements of pricing strategies. (C) 1999 Elsevier Science B.V. All rights reserved.