Entry regulation, firm’s behaviour and social welfare

This work performs a comparative welfare analysis of two types of entry regulation in a duopolistic retail market: number of licenses and minimum distance between stores. In a linear (Hotelling) market we show that a minimum distance rule is beneficial for consumers and disadvantageous for the firms...

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Bibliographic Details
Published in:European journal of law and economics 2015-08, Vol.40 (1), p.13-31
Main Authors: Elizalde, Javier, Kinateder, Markus, Rodríguez-Carreño, Ignacio
Format: Article
Language:English
Subjects:
Codes
Commercial Law
Competition
Consumers
Drug stores
Duopoly
Economic models
Economic statistics
Economic theory
Economics
Economics and Finance
Elasticity of demand
Equilibrium
European Integration
Game theory
Law and Economics
Licenses
Market entry
Pharmacy
Prices
Product differentiation
Public Finance
Regulation
Restrictions
Retail trade
Retailing industry
Social welfare
Studies
Values
Citations: Items that this one cites
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Summary:This work performs a comparative welfare analysis of two types of entry regulation in a duopolistic retail market: number of licenses and minimum distance between stores. In a linear (Hotelling) market we show that a minimum distance rule is beneficial for consumers and disadvantageous for the firms when demand is sufficiently inelastic. The distance rule that maximises social welfare is one quarter of the market under which firms will be located at the quartiles. Those locations are also optimal under regulated prices. Moreover, our model of two licenses with simultaneous entry is the first one that performs the horizontal product differentiation analysis using quadratic transportation costs and a binding reservation price. We find that a subgame perfect equilibrium exists for all the values of the reservation price and, for those values that induce a unique location equilibrium, the distance between the firms ranges from one half of the of the market to the whole market length.This analysis, which is not yet considered in the literature, is motivated by a change of entry regulation in the drugstore market in the Spanish region of Navarre. Since the demand in this market is quite inelastic, the minimum distance rule maybe socially more beneficial than the license rule.
ISSN:0929-1261
1572-9990
1572-9346
DOI:10.1007/s10657-014-9471-y