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The Circular City with Heterogeneous Firms

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  • Marco Alderighi

    ()
    (University of Valle d'Aosta, Italy.)

  • Claudio A. Piga

    ()
    (Dept of Economics, Loughborough University)

Abstract

The 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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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/circle_city_WP_Lboro.pdf
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Bibliographic Info

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2008_03.

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Date of creation: Jul 2008
Date of revision: Jul 2008
Handle: RePEc:lbo:lbowps:2008_03

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Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html
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Keywords: Localized competition; market effciency; cost heterogeneity; large markets.;

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References

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  1. Waterson, Michael, 1990. "Product Differentiation and Profitability: An Asymmetric Model," Journal of Industrial Economics, Wiley Blackwell, vol. 39(2), pages 113-30, December.
  2. Michael H. Riordan & Yongmin Chen, 2005. "Price and Variety in the Spokes Model," Discussion Papers 0405-20, Columbia University, Department of Economics.
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  7. Rothschild, R, 1982. "Competitive Behaviour in Chain-Linked Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 57-67, September.
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  9. Bester, Helmut, 1992. "Bertrand Equilibrium in a Differentiated Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 433-48, May.
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  12. Anthony Creane, 2007. "Note on uncertainty and socially excessive entry," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(4), pages 329-334.
  13. von Ungern-Sternberg, Thomas, 1991. "Monopolistic Competition on the Pyramid," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 355-68, June.
  14. Volker Nocke, 2003. "A Gap for Me: Entrepreneurs and Entry," PIER Working Paper Archive 03-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  15. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
  16. Eaton, B Curtis & Lipsey, Richard G, 1978. "Freedom of Entry and the Existence of Pure Profit," Economic Journal, Royal Economic Society, vol. 88(351), pages 455-69, September.
  17. Aiura, Hiroshi & Sato, Yasuhiro, 2008. "Welfare properties of spatial competition with location-dependent costs," Regional Science and Urban Economics, Elsevier, vol. 38(1), pages 32-48, January.
  18. Claudio A. Piga, 1998. "A Dynamic Model of Advertising and Product Differentiation," Review of Industrial Organization, Springer, vol. 13(5), pages 509-522, October.
  19. Montagna, Catia, 1995. "Monopolistic Competition with Firm-Specific Costs," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 318-28, April.
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Citations

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Cited by:
  1. Alderighi, Marco & Piga, Claudio A., 2010. "On cost restrictions in spatial competition models with heterogeneous firms," Economics Letters, Elsevier, vol. 108(1), pages 40-42, July.
  2. Matthew Beacham, 2012. "The effect of Stackelberg cost reductions on spatial competition with heterogeneous firms," Discussion Papers 12/14, Department of Economics, University of York.

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