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A spatial equilibrium model of local nonmarket production with capacity constraints


  • T. Heikkinen



This paper studies the autonomous formation of regions with local nonmarket production in the presence of profit-maximizing producers. The approach is based on a spatial equilibrium model with a linear transport cost. A Hotelling duopoly model is extended by allowing the households, uniformly distributed on a line, to become local producers. Due to capacity restrictions, local production covers at most a given percentage of a fixed household demand, whereas the remaining portion is bought from one of the profit-maximizing suppliers. Local production is pro-competitive, implying a lower equilibrium price than the standard Hotelling model, in spite of capacity restrictions. A price equilibrium where the firms are located symmetrically within the quartiles may exist, assuming a sufficient degree of self-sufficiency of local production. A higher level of capacity restrictions implies a higher equilibrium price. Local production may emerge as an equilibrium outcome, assuming the production does not require strong economies of scale and assuming the households are willing to invest in local production. Due to imperfect competition, the equilibrium number of local producers is positive whenever local production is optimal. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • T. Heikkinen, 2015. "A spatial equilibrium model of local nonmarket production with capacity constraints," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 62(4), pages 337-361, December.
  • Handle: RePEc:spr:inrvec:v:62:y:2015:i:4:p:337-361
    DOI: 10.1007/s12232-014-0220-x

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    References listed on IDEAS

    1. Martinez, Stephen W. & Hand, Michael S. & Da Pra, Michelle & Pollack, Susan L. & Ralston, Katherine L. & Smith, Travis A. & Vogel, Stephen J. & Clark, Shellye & Lohr, Luanne & Low, Sarah A. & Newman, , 2010. "Local Food Systems: Concepts, Impacts, and Issues," Economic Research Report 96635, United States Department of Agriculture, Economic Research Service.
      • Martinez, Steve & Hand, Michael & Da Pra, Michelle & Pollack, Susan & Ralston, Katherine & Smith, Travis & Vogel, Stephen & Clarke, Shellye & Lohr, Luanne & Low, Sarah & Newman, Constance, 2010. "Local food systems: concepts, impacts, and issues," MPRA Paper 24313, University Library of Munich, Germany.
    2. Gronau, Reuben, 1977. "Leisure, Home Production, and Work-The Theory of the Allocation of Time Revisited," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1099-1123, December.
    3. Christian Ahlin & Peter D. Ahlin, 2013. "Product Differentiation Under Congestion: Hotelling Was Right," Economic Inquiry, Western Economic Association International, vol. 51(3), pages 1750-1763, July.
    4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    5. T. Heikkinen, 2014. "A Hotelling model of spatial competition with local production," Letters in Spatial and Resource Sciences, Springer, vol. 7(2), pages 103-120, July.
    6. Curtis, Fred, 2003. "Eco-localism and sustainability," Ecological Economics, Elsevier, vol. 46(1), pages 83-102, August.
    7. Asanga Gunawansa, 2011. "Contractual and policy challenges to developing ecocities," Sustainable Development, John Wiley & Sons, Ltd., vol. 19(6), pages 382-390, November.
    8. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
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    More about this item


    Spatial economics; Local production; Nonmarket production; Price equilibrium; Duopoly; Degrowth; Ecocities; D4; L1; Q5; R2; R32;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis


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