Spatial Competition and the Theory of Differentiated Markets - An Introduction

SPATIAL economics has been both in the very center of microeconomic theory and at its periphery. It has been at the center, to the extent that it has followed a tradition taking its roots in Hotelling's classic "Stability in Competition" paper [15] and has used spatial concepts to explain, by analogy, the pricing of differentiated commodities. It has been at the periphery, to the extent that it has considered spatial pricing as observed in real life situations, and tried to rationalize and evaluate observed spatial pricing techniques. The former approach focuses on f.o.b. pricing, which is apparently taken for granted. The latter focuses on discriminatory pricing, which appears as the most frequently used technique in the industrial world. The purposes of this special issue are to bring those two approaches together and to explore some of their analytical possibilities and limitations. The philosophy of this introductory paper is to show the need for an integration of both avenues in an analysis of differentiated markets. We begin by discussing the assumptions of what we will call the HotellingLosch approach and their implications in terms of the problems they allow us to tackle. Several papers in this issue contribute new insights in this respect. We then undertake a similar exercise for what may be called the GreenhutOhta approach focusing on spatial price discrimination, to discover the possibilities it may provide for an analysis of quality choice. At the outset, we note that its spatial approach typically implies partition of the

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