Agglomeration and Endogenous Absorptive Capacities: Hotelling Revisited

This paper proposes a theoretical model of spatial duopoly, where the location, on the one hand, and the absorptive capacity of ï¬ rms as function of their internal R+D investment, on the other hand, endogenously determine the maximum level of knowledge spillovers ï¬ rms might absorb. Our goal is to test whether this new modelling of spillovers affects the traditional outcomes in terms of ï¬ rms location choices . We solve a three-stage game, where ï¬ rms choose their geographical location, prior to their level of internal R+D expenditures, and ï¬ nally compete in prices. We found that, at the optimum, ï¬ rms choose the same level of internal R+D and set the same price, independently of their location. Moreover, ï¬ rms locate symmetrically and tends to agglomerate in the center of the market as the transportation costs increase, knowledge spillovers being in that case maximum.