Hotelling Bound : Pricing and Location to Serve Low-Income Consumers

We study an Hotelling-type model with income constrained consumers. As income constraints bind, the subgame perfect equilibrium locations exhibit intermediate differentiation and reduced prices. When income becomes more restrictive, firms settle on the socially optimal degree of differentiation. Within these regimes, consumers gain surplus with increasingly constrained income through reduced transportation costs and prices. Finally, when income is most restrictive, firms uncover part of the market and act as monopolists. Consumer surplus then declines with lower incomes. Thus firms ameliorate the plight of the poor when income constraints are moderate but aggravate poverty when incomes are most restrictive