Tilzo O.A.   Bykadorov I.  

Retailing under Monopolistic Competition

Reporter: Tilzo O.A.

In this paper, our research is aimed at building and the analysis of the model of vertical market interaction. A model of monopolistic competition, which incorporates several manufacturers, retailer, and consumers, is considered. The basis of the reasoning is the Dixit-Stiglitz model, which was modified by the introduction of an intermediary (retailer), that led to the appearance of a two-level interaction model.

It is assumed that there are two kinds of products in the economy. The first kind of product is a variety of different goods of the same nature, similar in price and quality (for example, milk of different brands). The second kind of goods is other non-competitive products. At the same time, each variety of goods is made only by one firm and each firm produces only one variety of goods. A separate firm seeks to maximize its profit, and the entrance on the market occurs until its presence in the market is only profitable, i.e. the free entry and exit condition holds, and firms enter until the following potential participant suffers losses.

The utility function, reflecting the dependence of the utility of the goods on the amount of their consumption, is introduced in the model. In general, it represents the quasilinear option of preferences set over a variety of two kinds of products. The paper uses a version with linear demand, proposed by Ottaviano, Tabuchi and Thisse, and is very popular when modeling of monopolistic competition. In this case, linear demand assumes a quadratic form of the utility function.

We consider the situation of the leadership of the retailer, manufacturers and, quite widespread, the Nash equilibrium. Decisions are implemented for each situation and a comparative analysis is conducted that reveals the influence of each type of interaction on society and consumers.

Thus, in this paper, the solutions of the problems considered in the model are presented, that supplement and extend the previously formulated conclusions. Comparative analysis allows to identify the impact of each type of interaction on society and consumers, as well as to determine the benefits (profits) of each market participant, including the amount of consumer surplus.

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