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Motelling: A Hotelling Model with Money

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  • Dean Corbae

    ()
    (University of Texas)

  • Borghan N. Narajabad

Abstract

We apply a mechanism design approach to a trading post environment where the household type space (tastes over variety) is continuous and it is costly to set up shops that trade differentiated goods. In this framework, we address Hotelling's Hot venerable question about where shops will endogenously locate in variety space across environments with and without money. Money has a role in our environment due to anonymity. Our specific question is whether monetary exchange leads to more product variety than an environment without money (i.e. a barter economy). We show that an efficient monetary mechanism does in fact lead to more product variety available to households provided the discount factor is sufficiently high, costs of operating shops are sufficiently low, and there is sufficient heterogeneity in tastes and abilities. We then show how this allocation can be implemented in a trading post economy with money. The paper is an attempt to integrate monetary theory and industrial organization

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File URL: http://repec.org/sed2006/up.27771.1140044092.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 778.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:778

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Keywords: Matching Models of Money; Trading Posts;

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  1. Gabriele Camera & Robert R. Reed & Christopher J. Waller, 2003. "Jack of All Trades or a Master of One? Specialization, Trade, and Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1275-1294, November.
  2. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
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