Endogenous Spatial Differentiation with Vertical Contracting

46 Pages Posted: 16 Aug 2010

See all articles by Frago Kourandi

Frago Kourandi

National and Kapodistrian University of Athens - Department of Economics

Nikolaos Vettas

Athens University of Economics and Business - Department of Economics; National and Kapodistrian University of Athens - Faculty of Economics; Centre for Economic Policy Research (CEPR)

Date Written: August 2010

Abstract

We set-up a linear city model with duopoly upstream and downstream. Consumers have a transportation cost when buying from a retailer, and retailers have a transportation cost when buying from a wholesaler. We characterize the equilibria in a five-stage game where location and pricing decisions (wholesale and retail) by all four firms are endogenous. The usual demand and price competition effects are modified and an additional strategic effect emerges, since the retailers' marginal costs become endogenous. Firms tend to locate farther away from the market center relative to the vertically integration case. When the wholesalers choose locations before the retailers, each wholesaler locates closer to the market center relative to the retailer locations, and relative to when the wholesalers cannot move first. Each wholesaler does this to strengthen the strategic position of its retailer by credibly pulling him towards the market center. As a result, the intensity of competition is higher and industry profit is lower when upstream locations are chosen before downstream locations. Variations of the model and welfare analysis are provided.

Keywords: Linear city, Locations, Spatial differentiation, Strategic commitment, Vertical contracting

JEL Classification: L13, R32

Suggested Citation

Kourandi, Frago and Vettas, Nikolaos, Endogenous Spatial Differentiation with Vertical Contracting (August 2010). CEPR Discussion Paper No. DP7948, Available at SSRN: https://ssrn.com/abstract=1658255

Frago Kourandi (Contact Author)

National and Kapodistrian University of Athens - Department of Economics ( email )

1, Sofokleous Str
Athens, GR- 10559
Greece

Nikolaos Vettas

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+30 210 8203179 (Phone)

National and Kapodistrian University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
+30 210 8203179 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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