PRICING POLICY REACTIONS TO AGGLOMERATION IN A MARKET WITH SPATIAL SEARCH

Price dispersion (variation) and agglomeration are common characterist ics of spatial markets, in particular, markets with imperfect consumer information and search. However, pricing and location strategies in t hese markets are not well analyzed since spatial search is difficult t o model without restricting the spatial dimension of the problem. This paper analyzes pricing and location strategies in a market with spati al search using a probabilistic modeling strategy that does not restri ct search patterns in the plane. Specifically, the analysis considers the pricing strategy of an isolated firm in response to the agglomerat ion of competing firms. Results indicate that spatial and temporal pri ce dispersion are effective responses to competitors' agglomeration. H owever, the relative effectiveness of these strategies varies with mar ket conditions. In addition, agglomeration can have some counterintuit ive effects. This paper also provides insights into existing theories of spatial search and spatial competition in spatially-restricted (lin ear and circular) markets.