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Frontiers of Economics in China

Front. Econ. China    2016, Vol. 11 Issue (3) : 519-536     https://doi.org/10.3868/s060-005-016-0027-1
Orginal Article
Spatial Competition and Lowest Price Commitment
Hao Wang()
National School of Development, Peking University, Beijing 100871, China
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Abstract

This paper suggests that credibly committing to the strictly lowest price can be profitable and self-fulfilling in a spatial price competition. Consumers live in multiple residential zones. Each zone has a store. Consumers incur heterogeneous transportation costs moving between two zones. When there is one store credibly committing to the strictly lowest price, there is a pure strategy equilibrium in which a discount store directly competes with all other stores. The discount store offers the lowest price, takes the largest market share, and makes more profits than the other stores. Moreover, the low price commitment is not binding in equilibrium, which implies that the commitment is self-fulfilling.

Keywords convenience store      discount store      low price commitment      spatial competition     
Issue Date: 23 September 2016
 Cite this article:   
Hao Wang. Spatial Competition and Lowest Price Commitment[J]. Front. Econ. China, 2016, 11(3): 519-536.
 URL:  
http://journal.hep.com.cn/fec/EN/10.3868/s060-005-016-0027-1
http://journal.hep.com.cn/fec/EN/Y2016/V11/I3/519
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