Product Differentiation in a Regulated Market: A Welfare Analysis

Abstract

This article analyses both a circular and a linear market where consumers are distributed along the whole space, whilst firms are located in a region restricted by the regulator. We consider a three stage game in which in the first stage the regulator chooses the size of the space where firms will be located (the commercial area), in the second stage firms choose locations and in the third stage they compete in prices. We find that with this type of market configuration independently of space considered under quadratic transportation costs, there exists price equilibrium for every possible firms’ location. We also derive that the optimal size of the commercial area will depend on the welfare function of the regulator and, in particular, that once a regulator bias is considered, maximum differentiation, minimum differentiation or intermediate cases may be obtained.