Centrality and Pricing in Spatially Differentiated Markets

Abstract

The present paper highlights the importance of ‘centrality’ for the determination of firms’ prices. Some products/firms are more influential in determining prices of rival products/firms than others; the influence of an individual product/firm is captured by the concept of ‘centrality’. Our analysis extends the ‘spokes model’ introduced by Chen and Riordan (2007), which combines features of the two ‘classical’ approaches of modelling product differentiation: localized and non-localized competition. A further attractive feature of this approach is that the centrality of products/firms is based on a definite and easy to visualize physical foundation. In the case of gasoline, for example, ‘centrality’ can be measured by using information on the location of gasoline stations on the road network. The implications of this model are tested for the retail gasoline market in Austria by estimating price reaction functions for gasoline using a spatially autoregressive model.