Competitive delivered pricing and production

This paper studies price and production competition between profit-maximizing lirms that use delivered spatial prices. Firms produce an identical good and customers buy from the firm offering the least delivered price. Each firm’s transportation cost is quantity dependent and customers’ demands are price elastic. This contrasts with much of the literature on competitive spatial pricing that assumes inelastic customer demand and linear firm costs, and which ignores the firm’s production problem. This paper makes three contributions. First, a game-theoretic model is defined and the existence of the delivered price and production equilibrium is proved. Second, properties of the equilibrium are shown including patterns of spatial pricing. Properties of pricing and production are different from the case when transportation costs are quantity independent. For example, more than one firm may serve a single market. Third, it is shown that in equilibrium, competing firms may optimally choose delivered mill prices and have incentive to locate coincidentally. This result can explain coincident location of mill pricing firms.