Competition for territories under the switching cost

This study considers an effective policy to mitigate market powers held by retail liquefied petroleum gas distributors in Japan. A bilateral spatial competition model is constructed to analyse the effect of switching costs of consumers on retail competition in designated areas where stores provide free delivery service at uniform prices. Model analysis shows that, at equilibrium, stores have exclusive delivery areas which are their natural territories given endogenously. If stores commit to their territories, promoting competition with the adjacent market would be effective. Whereas, if stores do not commit, policies to lower the switching cost are effective.