() and Kaj Martensen
Richard Friberg: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Kaj Martensen: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Abstract: To the surprise of many, price deviations between markets characterized by imperfect competition have often been little affected by lower transport costs. In a Cournot model we show that if firms' decisions to segment markets are endogenous, then lower transport costs are, in many cases, associated with greater price differentials between markets. The intuition is that lower transport costs, by facilitating arbitrage, place a tighter restriction on the maximization problem and a firm is willing to take a greater cost in order to segment. We examine how the resulting equilibria depend on transport costs, product differentiation and costs of segmenting.
28 pages, October 30, 2001
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