PRODUCT VARIETY AND WELFARE UNDER TOUGH AND SOFT PRICING REGIMES

We re-examine the economic justification for the regulation of firms' price policies. Existing analysis of the relative benefits of alternat ive pricing policies, by treating market structure as exogenous, loses an important trade-off Price deregulation leading to, for example, di scriminatory pricing, on the one hand, enhances competition between in cumbents but, on the other, acts as a strong deterrent against entry. We illustrate this trade-off by analysing the familiar address model o f product differentiation and show that product variety is determined by the degree of spatial contestability of the market (the ability of entrants to make binding location commitments) and by whether firms ar e free to price discriminate.