Iñaki Aguirre and María Paz Espinosa

Product differentiation with consumer arbitrage"
JEL codes: D82, L13, R32
Keywords: spatial price discrimination, product differeentiation, personal arbitrage

Abstract: 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.
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