Entry regulation, firm’s behaviour and social welfare

Abstract

This work performs a comparative welfare analysis of two types of entry regulation in a duopolistic retail market: number of licenses and minimum distance between stores. In a linear (Hotelling) market we show that a minimum distance rule is beneficial for consumers and disadvantageous for the firms when demand is sufficiently inelastic. The distance rule that maximises social welfare is one quarter of the market under which firms will be located at the quartiles. Those locations are also optimal under regulated prices. Moreover, our model of two licenses with simultaneous entry is the first one that performs the horizontal product differentiation analysis using quadratic transportation costs and a binding reservation price. We find that a subgame perfect equilibrium exists for all the values of the reservation price and, for those values that induce a unique location equilibrium, the distance between the firms ranges from one half of the of the market to the whole market length.This analysis, which is not yet considered in the literature, is motivated by a change of entry regulation in the drugstore market in the Spanish region of Navarre. Since the demand in this market is quite inelastic, the minimum distance rule maybe socially more beneficial than the license rule.