Hotelling Bound: Pricing and Location to Serve Low-Income Consumers

14 Pages Posted: 19 Apr 2023

See all articles by Mihkel M. Tombak

Mihkel M. Tombak

University of Toronto; University of Toronto

Sander Heinsalu

Compass Lexecon - London Office

Date Written: April 6, 2023

Abstract

We study an Hotelling-type model with income constrained consumers. As income constraints bind, the subgame perfect equilibrium locations exhibit intermediate differentiation and reduced prices. When income becomes more restrictive, firms settle on the socially optimal degree of differentiation. Within these regimes, consumers gain surplus with increasingly constrained income through reduced transportation costs and prices. Finally, when income is most restrictive, firms uncover part of the market and act as monopolists. Consumer surplus then declines with lower incomes. Thus firms ameliorate the plight of the poor when income constraints are moderate but aggravate poverty when incomes are most restrictive.

Keywords: Income constraints, Hotelling

JEL Classification: L13, L12, D43, I32

Suggested Citation

Tombak, Mihkel M. and Heinsalu, Sander, Hotelling Bound: Pricing and Location to Serve Low-Income Consumers (April 6, 2023). Available at SSRN: https://ssrn.com/abstract=4412060 or http://dx.doi.org/10.2139/ssrn.4412060

Mihkel M. Tombak (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3E6 M5S 3G8
Canada

University of Toronto ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
9054837877 (Phone)

Sander Heinsalu

Compass Lexecon - London Office

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