Endogenous market boundary and spatial price discrimination with a quadratic production cost function
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This paper examines the welfare effects of spatial price discrimination. In the model a monopolist sells its product to a continuum of consumers distributed uniformly along a line market in which the market boundary is endogenously determined. We find that the monopolist always serves more consumers and sells more outputs under discriminatory pricing than under uniform pricing. Nevertheless, the welfare ranking between the two pricing policies is ambiguous. Results show that uniform pricing is more socially desirable than discriminatory pricing as long as the production cost function is sufficiently convex. This result is in sharp contrast to the finding in the literature that spatial price discrimination is more socially desirable than uniform pricing.