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Why Should a Firm Choose to Limit the Size of its Market Area?

We study when a monopolistically-competitive firm may optimally choose to limit the size of its market. This may be the case when the cost of serving the market with geographically dispersed customers is increasing in size. We also investigate the incentives faced by a firm to limit the reach of its market, when it adopts different pricing schemes. We show that under certain assumptions the derived equilibria are constrained socially optimal.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Alderighi-Piga-2007_21.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_21.

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Date of creation: Aug 2007
Date of revision: Aug 2007
Handle: RePEc:lbo:lbowps:2007_21
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  1. James E. Anderson & Eric van Wincoop, 2001. "Borders, Trade and Welfare," Boston College Working Papers in Economics 508, Boston College Department of Economics.
  2. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-46, December.
  3. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  4. Hart, Oliver D, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 529-46, October.
  5. Kohlberg, Elon, 1983. "Equilibrium store locations when consumers minimize travel time plus waiting time," Economics Letters, Elsevier, vol. 11(3), pages 211-216.
  6. Chaug-Ing Hsu & I-Jin Tsai, 1999. "articles: Logistics cost, consumer demand, and retail establishment density," Papers in Regional Science, Springer, vol. 78(3), pages 243-263.
  7. Fujita, M. & Thisse, J.-F., . "Economics of agglomeration," CORE Discussion Papers RP -1250, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Hsu, Song-ken, 1979. "Monopoly Output under Alternative Spatial Pricing Techniques: Comment," American Economic Review, American Economic Association, vol. 69(4), pages 678-79, September.
  9. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  10. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  11. Anderson, Simon P & de Palma, André, 1996. "From Local to Global Competition," CEPR Discussion Papers 1328, C.E.P.R. Discussion Papers.
  12. Claudio Piga & Joanna Poyago-Theotoky, 2003. "Endogenous R&D Spillovers and Locational Choice," CRIEFF Discussion Papers 0310, Centre for Research into Industry, Enterprise, Finance and the Firm.
  13. Ottaviano, Gianmarco & Puga, Diego, 1997. "Agglomeration in the Global Economy: A Survey of the 'New Economic Geography'," CEPR Discussion Papers 1699, C.E.P.R. Discussion Papers.
  14. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Optimal Bypass and Cream Skimming," American Economic Review, American Economic Association, vol. 80(5), pages 1042-61, December.
  15. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  16. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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