ON THE EFFICIENCY OF LOCATION DECISIONS UNDER DISCRIMINATORY PRICING

The paper analyzes the question of whether delivered pricing policies give rise to an inefficient location of firms, and in particular to a geographical distribution of capacity which is overly concentrated. The analysis adds to the literature on spatial pricing and location decisions the element of uncertainty over the timely delivery of products, and therefore the possibility that risk-averse consumers may be willing to pay a higher delivered price for products if they can hedge and divide their orders among two suppliers. The results are in strong contradiction to the common belief that identical delivered pricing systems produce a highly inefficient distribution and that f.o.b. would yield the optimal location. However, it is shown that in markets with coordination problems the concern about excessive concentration of productive capacity may be legitimate.