The Circular City with Heterogeneous Firms
AbstractThe paper extends the Salop model of localized competition by allowing firms to have heterogeneous costs. We provide a general but highly tractable analytical solution for the equilibrium prices, and we study the long-run properties of the model using two different entry games. We show that cost heterogeneity affects the efficiency of the market equilibrium by increasing welfare and inducing less excessive entry. Further, we illustrate the positive effects of the existence of a selection mechanism, which induces less efficient firms not to start production. The model also replicates some recent results on dense markets.
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Bibliographic InfoPaper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2008_03.
Date of creation: Jul 2008
Date of revision: Jul 2008
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Postal: Loughborough, Leicestershire, LE11 3TU
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Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html
More information through EDIRC
Localized competition; market effciency; cost heterogeneity; large markets.;
Other versions of this item:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-30 (All new papers)
- NEP-COM-2008-07-30 (Industrial Competition)
- NEP-GEO-2008-07-30 (Economic Geography)
- NEP-IND-2008-07-30 (Industrial Organization)
- NEP-MIC-2008-07-30 (Microeconomics)
- NEP-URE-2008-07-30 (Urban & Real Estate Economics)
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