The role of an intermediate market within the barbell model

Abstract

This paper extends Hwang and Mai (Am Econ Rev 80:567–575, 1990) with an intermediate market to discuss the spatial pricing and social welfare. It is shown that the monopoly will always locate at this intermediate market under discriminatory pricing. Under simple mill pricing, the intermediate market will be the optimal location if the slope of the demand function at this market is large enough. Moreover, in contrast to Hwang and Mai (Am Econ Rev 80:567–575, 1990), the total outputs under discriminatory pricing may be either greater or less than those under simple mill pricing, and social welfare under simple mill pricing is lower (higher) than that under discriminatory pricing if the transport rate is large (low) enough.