Iñaki Aguirre and
María Paz Espinosa "
"Product differentiation with consumer arbitrage
JEL codes: D82, L13, R32
Keywords: spatial price discrimination, product differeentiation, personal arbitrage
We determine the equilibrium to a game where two
firms set delivered price schedules and consumers simultaneously declare where
they want to take delivery of the product. Equilibrium pricing policies provide
incentives for consumers not to demand their preferred varieties but rather to
purchase more standard varieties. This behavior may decrease market diversity:
the demanded varieties tend to agglomerate around the market center. We also
show that it is efficient for the cost of adapting the product to consumers to
be shared through arbitrage, but oligopoly gives rise to an inefficient level
of personal arbitrage.
Pre-publication pdf copy.