Scandinavian Working Papers in Economics

Oslo University, Department of Economics

No 12/2016: Another model of sales. Price discrimination in a differentiated duopoly market

Halvor Mehlum ()
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Halvor Mehlum: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: Using a model of horizontal differentiation where a variety dimension is added to Hotelling's (1929) "linear city" duopoly model, I show that even when costs and demand are symmetric, price discrimination may be an equilibrium phenomenon. In the model each customer have a preferred variety and a preferred firm. They have perfect information about all prices and may be induced to switch variety and firm given a sufficient price difference. Price discrimination equilibrium exists when a sufficient fraction of consumers are elastic both with respect to variety and firm.

Keywords: Duopoly; price discrimination

JEL-codes: D43

18 pages, September 23, 2016

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