Sequential quality and price competition in hotelling model

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We allow sellers in Hotelling model to choose "quality" (referring to the gross surplus of product) before choosing prices and examine welfare implications of introducing a horizontally differentiated product into a monopoly market. Under certain parameter assumptions, we show that entry results in lower prices, lower qualities, (typically) lower consumers' surplus and lower social welfare. Our findings suggest that we should not regard the number of sellers in a differentiated market to be a simple measure of competitiveness.

Original languageEnglish
Pages (from-to)143-164
Number of pages22
JournalJournal of Economic Theory and Econometrics
Issue number2
StatePublished - Jun 2012


  • Entry
  • Horizontal differentiation
  • Vertical differentiation


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