Competitive Franchising
30 Pages Posted: 30 Jun 2008
Date Written: June 26, 2008
Abstract
We develop a tractable spatial model of oligopolistic competition in which firms endogenously determine both franchise/product locations and prices. Remarkably, when firms only differ along the endogenous spatial dimension, they earn zero profits: while ex-post consumer heterogeneity ensures positive gross profits, competition for market share results in socially excessive product lines and zero net profits. We then introduce exogenous taste heterogeneity, so that consumers also differ in their ex-ante preferences over product lines. We find that price competition due to the endogenous spatial dimension drives profits below what they would be with only taste heterogeneity.
Keywords: spatial competition, multi-product oligopoly, endogenous heterogeneity
JEL Classification: L11, L13
Suggested Citation: Suggested Citation
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