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Location Decisions in a Natural Resource Model of Cournot Competition

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  • Ricardo Biscaia

    ()
    (Faculdade de Economia do Porto)

  • Paula Sarmento

    ()
    (Faculdade de Economia do Porto)

Abstract

This article focuses on the location decision of firms when competing in a spatial Cournot duopoly. Our original contribution is that firms are dependent on a natural resource input, which is assumed to be located in one of the extremes of the market, to be able to produce the output sought by the consumers, and that natural resource is controlled by an independent monopolist. We solve a three stage location game, where in the first stage downstream firms choose their location, and in the next stages upstream and downstream choose how many quantities they sell in the market, assuming that downstream firms must sell their product in all points of the linear city. We conclude that downstream firms agglomerate independently of the unit input transportation cost. In addition, increases in the unit transportation cost bring the plants closer to the natural resource location. Moreover, the upstream firm loses more profit than the downstream firms when the input transportation conditions deteriorate. When we consider the problem of a social planner, we conclude that the location that firms choose is nearly the same than the location that maximizes total welfare in the economy.

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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 509.

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Length: 31 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:por:fepwps:509

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Keywords: Spatial Competition; Vertical Markets; Duopoly Studies; Game Theory;

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  1. IRMEN, Andreas & THISSE, Jacques-Francois, 1997. "Competition in multi-characteristics spaces: hotelling was almost right," CORE Discussion Papers 1997053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  3. Anderson, Simon P & Neven, Damien J, 1991. "Cournot Competition Yields Spatial Agglomeration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 793-808, November.
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  11. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
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  15. Fershtman, Chaim, 1985. "Managerial incentives as a strategic variable in duopolistic environment," International Journal of Industrial Organization, Elsevier, vol. 3(2), pages 245-253, June.
  16. Ricardo Biscaia & Paula Sarmento, 2012. "Spatial Competition and Firms’ Location Decisions under Cost Uncertainty," FEP Working Papers 445, Universidade do Porto, Faculdade de Economia do Porto.
  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. Koji Ishibashi, 2001. "Strategic delegation under quality competition," Journal of Economics, Springer, vol. 73(1), pages 25-56, February.
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