Competition, Land Price, and City Size

Larger cities typically give rise to two effects working in opposite directions: tougher competition among firms and higher production costs. Using an urban model with substitutability of production factors and pro-competitive effects, we study how market outcome responds to city population size, land-use regulation and commuting costs. For industries with small input of land, larger cities host more firms which set lower prices whereas larger cities accommodate more firms which charge higher prices in industries with intermediate land share in production. Furthermore, for industries with high input share of land, larger cities allocate fewer firms with higher product prices. We show that softer land-use regulation and/or lower commuting costs reinforce pro-competitive effects making larger cities more attractive for residents via lower product prices and broader variety for a larger number of industries.